Fed Rate Hike Expectations Surge as Gold and Bitcoin Lead the Debasement Trade

Recent US macro data has sent mixed signals: sticky inflation combined with fiscal pressure has put the Federal Reserve's monetary policy in a dilemma. At the same time, gold and Bitcoin and other "debasement trade" assets have strengthened significantly, and market funds are showing signs of rotating out of the AI sector.

Inflation and PCE Data: Sticky as Ever, Core Gauge Remains Stubborn

US July PCE inflation was 3.7%, slightly above expectations and still near a three-year high. The annual core PCE was 3.3%, and economic performance remained strong, supporting the Fed staying on hold for now. Analysts believe geopolitical factors such as the Iran conflict are still pushing up inflation, and a clear turning point is unlikely in the short term unless there is a major structural shift in the economy or geopolitical tensions ease. Some analysts note that if inflation remains elevated, further rate hikes may ultimately be needed.

Slowing GDP and the Fed's Dilemma

US Q2 GDP grew 1.5%, meeting expectations but below the same period last year. Fed official Bullard said that staying on hold could leave policy behind the curve, while cutting rates would conflict with Treasury Secretary Bessent's goal of lowering long-term rates. The Fed is "between a rock and a hard place": either wait for inflation to turn or face macroeconomic headwinds, with the biggest potential risk likely coming from an escalation of the Iran conflict.

Bessent's Fiscal Operations and Controversy

Treasury Secretary Bessent is trying to lower long-term rates through debt management, in ways similar to the Yellen era. Current US debt interest costs are about $1.1 trillion; if a large amount of debt is rolled over at higher rates, the interest burden could rise to $1.5 trillion. The market is divided on his policy: Bessent previously criticized Yellen's approach but has now adopted similar tactics, raising questions about his credibility. However, Wall Street analyst Tom Lee believes the Treasury's bond buybacks are a smart move that sends a value signal to the market, not manipulation.

Rate Hike Odds Rise Quickly

The probability of a Fed rate hike in September has risen from 30% a week ago to above 40%. Prediction market Polymarket shows a 56% probability of a rate hike in 2026, mainly focused on the December meeting. Rate hike expectations are becoming the market's new dominant narrative, with both bond market and interest rate derivatives pricing reflecting this shift.

Debasement Trade Heats Up: Gold and Bitcoin in Tandem

Commodity strategist Jeff Curry noted that the heavy debt burden forces governments to effectively tolerate inflation, and gold and Bitcoin are reacting to this trend. Gold rebounded from a low near $4,000 to $4,700 and could retest its all-time high of $5,500, possibly before the end of September. Precious metals and Bitcoin ETFs saw combined weekly net inflows of $7 billion, a 5-day record. The metals market is in its most overbought condition since January, similar to periods near all-time highs. Bitcoin's correlation with gold is strengthening, reinforcing the debasement trade logic.

AI Trade and Capital Rotation

The AI sector had previously siphoned off a large amount of liquidity, but recently the debasement trade has begun to take center stage. NVIDIA's earnings report is a key variable: if it meets market expectations, its revenue will have grown by nearly $90 billion since Q2 2020, potentially boosting tech stocks and overall market sentiment. But even if the AI narrative continues, there are signs of capital rotating into hard assets such as gold and Bitcoin. Analysts believe AI has attracted large amounts of capital as a government-backed industrial policy, and when liquidity spills over, Bitcoin is likely to be a key recipient.

Institutions Accelerate Crypto Asset Allocation

BlackRock has lowered the minimum in-kind conversion amount for the iShares Bitcoin Trust (IBIT) from $25 million to $1 million, allowing high-net-worth investors to convert holdings tax-free at a lower threshold and reduce tax and physical risks. Meanwhile, the SEC has submitted a proposal to reform crypto custody rules for registered investment advisers (RIAs), which could accelerate traditional financial institutions' provision of custody and allocation services. Wall Street analyst Bernstein predicts Bitcoin could recover to $150,000 by mid-2027 and reach $300,000 by 2029. These developments may attract family offices and high-net-worth individuals to accelerate allocations to crypto assets.

Conclusion

The current macro environment is complex, with inflation, rate hikes, and fiscal pressures intertwined. Gold and Bitcoin are being sought after as debasement hedges, and there are clear signs of capital rotating from AI into hard assets. The Fed's future policy path, the evolution of geopolitical conflicts, and institutional inflows will determine the market's direction. This article only compiles public opinions and data and does not constitute investment advice.