Don’t fight the Fed. Wall Street has an adage for this: never go against the Fed. This time, it is she who changes meaning. The American Federal Reserve has just decided: its key rates have increased by 25 basis points, to 3.75-4.00%. This is its first increase since July 2023, after six consecutive declines and around 175 basis points since then.
The market had already almost completely digested the news before it broke. The fact remains that crypto has suffered a hard blow since the failure of the CLARITY Act in the Senate on Tuesday evening. Two shocks in 48 hours. It leaves marks.
Fed: rate increase voted unanimously
The verdict fell at 8 p.m. Paris time. The official FOMC press release leaves no room for doubt: the Monetary Policy Committee raises the Fed Funds target range to 3.75%-4.00%, by a unanimous vote, 12 votes to 0. Not the slightest dissent, unlike the status quo voted by nine votes to three in July.
The text, however, remains sober. Economic activity is “expanding at a solid pace”, job creation follows the pace of the workforce. But inflation “remains elevated”. This increase should allow “a more rapid return” towards the 2% objective (a timelier return to the 2 percent goal).
The ground was well prepared, it must be said. U.S. retail sales in August rebounded 1.2%, a big turnaround after July's 0.6% decline, according to the U.S. Census Bureau. Enough to convince the last undecided members of the committee that the economy could withstand an additional turn of the screw.
“The Federal Open Market Committee approved the following statement for publication by a vote of 12 – 0: The Committee decided to increase the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent, in support of the Federal Reserve's dual mandate.
The Committee continues its policy of maintaining significant reserves in the banking system. Economic activity is growing at a sustained pace. Although uncertainty remains high due in part to geopolitical developments, domestic spending has been resilient.
Productivity growth is strong and capital investment is robust. Job creation has kept pace with the active population and the unemployment rate has changed little.
Inflation remains high. The policy measures taken today will support a faster return to the 2% target set by the Committee. The Committee will ensure price stability.”
Dot plot: a new increase is looming before the end of the year
This is the real piece. The dot plot, a cloud of points where each committee member indicates where they see rates in the coming months, has just been published at the same time as the decision, in the Fed's Summary of Economic Projections (SEP). And it will not reassure the optimists.
The median stands at 4.1% for the end of 2026. Translation: a further increase of 25 basis points is already envisaged by December. The trajectory then remains flat in 2027, still at 4.1%, before gradually falling again: 3.9% in 2028, then 3.6% in 2029.
Another stinging figure: PCE inflation (the Fed's preferred index) is now projected at 3.7% for 2026, compared to a target of 2%. Almost double. Underlying inflation (core PCE) climbs to 3.4%.
Bitcoin, the CLARITY Act and the Fed: one week too long
Before the announcement, the price of Bitcoin was hanging below $76,000. Far from the $79,500-80,000 posted just a few days ago. The queen cryptocurrency was already accumulating bad news: the failure of the CLARITY Act on Tuesday, rising bond yields, a thickening risk premium.
A rate increase alone doesn't change much. The market had been expecting it at more than 90% probability for weeks, via the CME FedWatch tool. What is more worrying is this new turn of the screw announced for December.
In the single hour following the announcement, the heatmap of liquidations already sets the tone: around $21.4 million in positions liquidated on Zcash, 20 million on Ether, and nearly 14 million on Bitcoin (figures to be cross-referenced and sourced precisely during the update). A more nervous reception than what the “already priced at 90%” suggested.
Kevin Warsh's conference
This paper is published before Kevin Warsh's press conference, scheduled for 8:30 p.m. Paris time. Its tone subsequently will count at least as much as the number of the day. It will, of course, be updated.
This increase closes a parenthesis open to the summer of 2023, that of a cycle of rate cuts that has become untenable in the face of inflation that refuses to bend. It opens another, more uncertain one, where each piece of data will have a direct impact on what happens next. The yield on the American 10-year bond at 5% had already set the tone even before the FOMC made its decision: the bond market had decided a long time ago.
