Federal Reserve Hike Already Priced In: Markets to Focus on Inflation and Policy Credibility

The upcoming Federal Reserve rate decision is expected to have a limited impact on market swings as investors have already priced in a September rate increase. The focus has shifted from the hike itself to what persistently high inflation and rising yields signal about the U.S. economy, policy credibility, and demand for risk assets such as Bitcoin.

Core CPI rose 0.3% in August, exceeding economists' 0.2% estimate, reinforcing market expectations of a Federal Reserve rate hike next week. This has led to a rally in risk assets, with Bitcoin trading at $78,600, up 1.5% in 24 hours.

Rising Treasury yields and simultaneous gains in Bitcoin and gold indicate investor anxiety over inflation, government debt, and potential currency debasement. According to Matt Mena, senior crypto research strategist at 21Shares, a rate hike does not automatically create a negative backdrop for Bitcoin, with an average 2.13% gain over the 30 days following hotter-than-expected core CPI readings.

Mark Connors, chief investment officer at Risk Dimensions, argues that rising Treasury yields suggest investors are worried about more than the level of short-term rates. He notes that in this environment, Bitcoin and gold can attract demand at the same time as alternatives when markets fear inflation, government debt pressures, and currency debasement.