The end of rate hikes?

Are there any rate hikes left?

Investors are currently assigning a 93% probability that the Federal Reserve will maintain its current interest rates in September, with only a 7% chance of a quarter-point rate increase, as reported by CME Group.

In the previous July meeting, the Federal Open Market Committee (FOMC) opted for a 25 basis point rate hike, marking the eleventh such increase since March 2022.

Presently, investors are indicating a 47% likelihood that the central bank will raise rates by at least another quarter of a percentage point at the November FOMC meeting.

The Federal Reserve will continue its practice of allowing up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities (MBS) to mature and roll off its balance sheet each month.

The Fed's balance sheet has experienced a decline from its record high of $8.9 trillion in May 2022 to approximately $8.1 trillion as of September. However, it remains nearly double its pre-pandemic size of $4.1 trillion in late February 2020.

The FOMC is also set to provide updates to its long-term U.S. economic growth projections, encompassing forecasts for GDP growth, unemployment rates, interest rates, and inflation.

In the Fed's previous economic projections from June, they anticipated 2023 U.S. GDP growth of 1%, an unemployment rate of 4.1%, and a terminal fed funds rate of 5.6%. Additionally, they revised their 2023 growth forecast for the core personal consumption expenditures price index, their preferred measure of inflation, from 3.6% to 3.9%.

In June, 12 out of 18 FOMC members projected that the upper end of the federal funds rate target range would reach at least 5.75% in 2023. However, it's likely that these expectations have evolved in recent months.

Investors will be closely monitoring the FOMC's updated outlook on the extent of interest rate increases for 2023 and the committee's assessment of how low rates could potentially go in 2024, when the Fed eventually shifts towards interest rate cuts.

Inflation still needs to go down

Regrettably, the Federal Reserve still confronts a considerable distance to travel in order to realign inflation levels with its established long-term objective of 2%.

As of late August, the Commerce Department unveiled its report indicating that the core PCE price index had surged by 4.2% year-over-year in July. This represented a slight uptick from the 4.1% increase noted in June. It's important to note that the core PCE inflation metric excludes the influence of volatile energy and food prices.

Simultaneously, the Labor Department disclosed that the consumer price index had risen by 3.2% year-over-year in July, falling just below the 3.3% increase anticipated by economists.

Quincy Krosby, who serves as the Chief Global Strategist for LPL Financial, has emphasized that the Fed faces an ongoing challenge in addressing what is commonly referred to as "sticky" core inflation.

Krosby explains, "While the PCE index has displayed an overall positive trajectory, core inflation persists in maintaining a higher degree of resilience than initially anticipated. This circumstance obliges the data-dependent and adaptable Fed to remain inclined toward potential rate increases later this year."

"Furthermore," she adds, "the trend toward disinflation remains consistent, but the Fed awaits a more pronounced decline in the numbers before it can confidently declare victory in its campaign to mitigate inflation."

Economy is slowing down

Despite the Federal Reserve's determined efforts at aggressive tightening, the U.S. economy has managed to maintain its overall stability. Regrettably, recent economic indicators are now sounding alarm bells, suggesting that the impact of higher interest rates may finally be taking a toll on the labor market.

On September 1, the U.S. Labor Department released its report indicating that the economy had added 187,000 jobs in August, surpassing the expectations of economists who had predicted the addition of 170,000 jobs. However, the U.S. unemployment rate simultaneously surged to 3.8%, marking its highest level since February 2022.

Average U.S. wages exhibited a year-over-year increase of 4.3% and a 0.2% uptick when compared to July. The months of June, July, and August collectively marked the three slowest periods for U.S. job growth since December 2020.

Brad McMillan, who serves as the Chief Investment Officer for Commonwealth Financial Network, highlights that the deceleration in jobs growth could, somewhat paradoxically, be viewed as positive news for inflation.

"Inflation has registered a slight uptick, but upon closer examination of the data, the prevailing trend still appears to be downward. While growth has moderated, it's important to note that the economy continues to expand," McMillan explains.

While the labor market remains constricted, analysts anticipate that higher interest rates will persist in exerting downward pressure on corporate earnings. Projections from analysts suggest a mere 0.5% year-over-year growth in S&P 500 earnings for the third quarter.

While concerns of a recession on Wall Street have somewhat subsided in 2023, the New York Fed still presents a projection of a 60.8% likelihood of a U.S. recession occurring within the next 12 months.

What does the FED say?

In the weeks following the previous Federal Open Market Committee (FOMC) meeting, various Federal Reserve members have offered insights for investors regarding what they can anticipate at the upcoming September meeting.

The FOMC's release of its meeting minutes on August 16 conveyed a clear message that the Fed's course of action will be contingent on incoming data. In the release, the Fed explicitly acknowledged that inflation persists at "unacceptably high" levels and highlighted "significant upside risks to inflation, which could necessitate further tightening."

During his annual monetary policy speech at the Jackson Hole Economic Symposium on August 25, Federal Reserve Chair Jerome Powell emphatically stated that inflation remains "too high" and reiterated the Fed's readiness to implement additional rate hikes. However, Powell also provided a measure of reassurance to investors by emphasizing that the combination of a resilient economy and moderating inflation affords the FOMC the latitude to "proceed carefully" in upcoming meetings.

In a speech delivered on September 6, Boston Federal Reserve President Susan Collins suggested that the FOMC might be approaching, or perhaps has already reached, the zenith of interest rates in the current cycle. She advocated for a "proceed cautiously" approach moving forward.

Richard Saperstein, Chief Investment Officer at Treasury Partners, cautioned that further rate hikes are still under consideration, and investors should not anticipate an imminent pivot towards rate cuts. Saperstein emphasized that the impact of Fed tightening continues to exert a negative influence on the economy, and prudence is advisable given the slowdown in growth and the elevated market valuations. It appears unlikely that the Fed will step aside in the near term, allowing the economy to regain momentum.

Between now and the commencement of the FOMC meeting on September 19, the Federal Reserve will receive a couple of pivotal data releases concerning the U.S. economy's health. The Labor Department is slated to unveil its August CPI inflation figures on September 13, while the University of Michigan is set to release its preliminary September U.S. Consumer Sentiment Index on September 15. These data points will contribute to the Fed's deliberations as they formulate their policy decisions.

How does this reflect on BTC?

Well to be honest I am getting cautiously bullish for in the short term, I do think that we can test higher prices in the short term and I will do an analysis to clarify my thesis.

1D-Timeframe

When we look at out current dealing range on the daily we can see that we are in discount still. As I have mentioned multiple times in the tradeletter, price tends to move from discount towards premium and vice versa. We are in discount and I have some reasons to belief that we will trade higher relatively soon.

We can see that we are breaking upwards and that is a good sign of course. However something that is noticeable is the way that we broke higher. We took out liquidity on the downside and we broke structure afterwards. What we can see is that we do not have any leftover gaps. All that price did is creating balanced price ranges which is good for a sustainable move towards the upside

I do think that we will see a run towards the high around 28.1K to take out BSL above that high. I even believe that we will see a test of the previous range low around 28.9K. These areas that are pointed are good regions for profit taking and we need to adapt our plan accordingly when these levels are reached.

All in all, an interesting week is coming up and I would say that we are going to see some movements in the crypto markets again.

Have a great week everyone!

Written by: Daan Foppen