US inflation: August CPI pushes the Fed towards a rate hike

This Thursday morning, everyone was expecting a flat figure. We had a stinging figure. Even before the release of the CPI, consumer confidence was already the second round of the day for Bitcoin. It was finally inflation, the first round of the morning, which brought everyone into agreement. The Fed now finds itself on the verge of deciding for an increase on September 16, and the market is no longer beating around the bush.

US CPI traps Fed in too hot underlying inflation

The August consumer price index showed an increase of 0.4% over the month and 3.4% over one year, right in line with the consensus. Nothing dramatic in appearance. Except that underlying inflation (excluding energy and food) increased by +0.3% over the month. Wall Street expected only 0.2%. A tenth of a point which doesn't look like much, but which is enough to reshuffle the cards of a meeting hitherto played to a coin toss.

Fed Chairman Kevin Warsh had already set the scene at the end of August, during his speech at Jackson Hole: the good inflation readings of the summer, he said, did not demonstrate a significant improvement in underlying trends. Add to that a producer price index which stood at 5.4% over one year and an August employment report of 162,000 creations which tripled expectations after a catastrophic month of July. The coin was rigged before it was even tossed.

Rising rates: the 85% bet that changes the game for the Fed

This morning again, the bets remained split. The CME Group's FedWatch tool gave a mere 56% chance of an increase of 25 basis points, Kalshi 48% and Polymarket 49%. A coin that could fall on both sides. The CPI was enough to swing it clearly to one side. The CME FedWatch now climbs to 85.4% probability of an increase towards 3.75-4%, and Polymarket follows the same trajectory around 81%. Within hours, an uncertain scenario became the market's default position.

The Fed is nevertheless moving forward under political pressure. Donald Trump publicly called for a rate cut on September 4, threatening trade restrictions if the institution refused to comply. The Fed, for its part, is sticking to its independence and has shown no sign of wavering.

Bitcoin and bond rates absorb the CPI shock

The bond markets reacted bluntly. The yield on the American 10-year rose from around 4.60% to almost 5.00%, that of the 2-year from 4.20% to 4.56%. More expensive money, across the entire curve, in a single morning.

Bitcoin first breathed. With the overall figure sticking to consensus, the queen of digital currencies surged toward $78,000, a relief rebound of more than 1% in an hour. Short, very short. By the time the market digested the overshooting of inflation and the rise in bond rates, Bitcoin fell back below $77,000 before stabilizing around $77,300. A round trip of a few hours, and a next test from 4 p.m. with the Michigan consumer confidence index, scrutinized as a barometer of inflation expectations.