Why the Fed Should Not Raise Interest Rates in September and What It Changes

The possibility of the Federal Reserve raising interest rates at the September meeting has fallen into the realm of the "very unlikely," according to Goldman Sachs' chief economist, Jan Hatzius. This conclusion came after a series of weak economic data in the United States, reinforcing the thesis that the monetary tightening cycle is behind us.

For those investing in risk assets, the reading is straightforward: without new interest rate hikes, the liquidity scenario is likely to remain stable or even improve in the coming months. This changes the risk calculation for virtually all asset classes, from the S&P 500 to bitcoin.

What Economic Data Is Telling the Fed

Goldman's assessment is based on three pillars. First, retail numbers, considered a central thermometer of American consumption, came in below expectations. Second, the labor market showed signs of slowing down. Third, inflation continued on a downward trajectory, in line with market projections.

Hatzius was categorical in a note sent to clients: "Under our baseline economic projections, inflation news has a greater chance of improving than worsening over the year." In the same communication, he stated that the market pricing for the Fed Funds rate is still "too hawkish," meaning it embeds more tightening than would be justifiable.

This reading is supported by data from CME FedWatch. So far, only 30.6% of traders are pricing in a 25 basis point hike, which would bring the rate to the range of 3.75% to 4%. The majority bets on maintenance. The probabilities receded after the July inflation report confirmed the expected slowdown, as we analyzed in our financial market coverage.

Why Interest Rates Matter So Much for Risk Assets

The basic rate set by the Fed acts as the price of money in the world's largest economy. When it rises, credit becomes more expensive, liquidity shrinks, and investors migrate to lower-risk assets, such as U.S. Treasury bonds. When it falls, or simply stops rising, the flow reverses.

The recent history illustrates this dynamic clearly. The aggressive monetary tightening cycle that began in 2022, when the Fed raised rates at the fastest pace in four decades, coincided with a drop of over 60% in bitcoin and a widespread bear market in cryptocurrencies. In the opposite direction, the emergency cuts in March 2020, in response to the pandemic, preceded a rally that took bitcoin from around $5,000 to over $60,000 in just over a year.

This is not a simple causality but a well-documented mechanism. The correlation between global liquidity and the price of digital assets is one of the most studied topics in the crypto market. And the Fed's signaling is the main vector of this equation.

The Current Bitcoin Scenario Through This Lens

Bitcoin is trading around $63,500, stuck in a narrow range between $62,000 and $66,000 for over a month. This type of lateralization often precedes significant directional movements, especially when accompanied by changes in the macro environment.

If the Fed indeed maintains the rate in September, as Goldman projects, the market may begin to price in cuts further down the line. This would represent a qualitative change in sentiment. Until now, the dominant narrative was of "high rates for longer." A revision of this expectation tends to broadly benefit risk assets.

It is worth noting that the derivatives market has already partially adjusted. The drop in hike probabilities reflects a shift in positioning among institutional traders. But there is room for additional repricing if the upcoming economic data, especially the payroll and the PCE for August, confirm the slowdown trend.

What to Watch in the Coming Weeks

Three events deserve immediate attention. The first is the Jackson Hole symposium, where Fed Chairman Jerome Powell usually signals the direction of monetary policy. Any mention of "sufficient progress" in inflation will be read as a green light for maintenance or even cuts.

The second is the August employment report. If the labor market continues to show signs of cooling, the case for new hikes becomes even weaker. The third is the PCE index, the Fed's preferred measure of inflation. A reading below 3% per year would practically eliminate any discussion of additional tightening.

For investors positioned in equities, crypto, or any interest-sensitive asset, the message is clear: the risk of negative monetary shock has decreased. This does not mean that markets will rise in a straight line. It means that one of the main sources of selling pressure over the past two years is losing strength. As we discussed in previous analyses on monetary policy, the transition from a tightening cycle to a loosening cycle is rarely linear, but its effects on prices are historically consistent.

Goldman Sachs is not alone in this reading. Other Wall Street firms are beginning to converge on the thesis that the peak of interest rates is already behind us. The question now is not whether the Fed will stop raising, but when it will start cutting.