Oh no, are they going to raise rates this week? Will Bitcoin and the US stocks fall hard? Let’s take a look.
Last week, once the CPI came in, the uncertainty about rate hikes basically became a done deal, because that’s what Waller himself said—he can’t exactly contradict himself, can he?
First, let’s see what happened. In August, the core CPI rose 0.3% month over month. As soon as the data was released, Goldman immediately changed its stance overnight: instead of waiting as originally planned, it upgraded to a 25-basis-point rate hike in September.
The reasoning was pretty straightforward too: the market has already priced in a 90% probability of a rate hike. If they don’t move now, it could trigger violent market swings. Investors would start to doubt the credibility of the Federal Reserve, and the Treasury market could run into serious trouble—so this might turn into a credibility showdown!
But honestly, this is also partly on Waller himself, because last time, in his speech, he dropped the hard line: if inflation doesn’t come down, the Fed hasn’t finished its job.
Now the situation is this—if inflation data really is surging, and they don’t raise rates, then all those tough words he said would just turn into an empty promise.
Put simply, in the pricing embedded in 30-year US Treasury yields, a big chunk is no longer just about inflation itself anymore. It’s about this question: will the Fed really do what it said it would do?
That’s what the word “credibility” really weighs.
Actually, Shu Qin personally believes that the reason Wall Street is putting this out there is to change market logic—so retail investors think that rate hikes are actually a good thing, that the Fed is keeping its word, and to provide justification for bullishness, preventing a big drop in the stock market. I have to admit, I’m impressed by these guys—washing it clean with such a nuanced angle. Of course, I hope for the same outcome, because we all want the market to go up.
If you think about it carefully, though: if rate hikes are already “set in stone,” then the real risk isn’t whether they hike or not—it’s in that dot plot. Does the dot plot imply that there’s another round coming?
If it suggests there will be a next time, that means the tightening cycle isn’t anywhere near over. Long-end interest rates would keep flying higher, and valuations for risk assets would keep getting pressured. But if it only signals that there will be just one more hike, the impact would be limited—maybe stocks wouldn’t fall much, and there could even be an opportunity for a rebound afterward.
So one letter makes all the difference.
Do you think the Fed will really raise rates this week?