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The Fed raised rates on Wednesday for the first time since July 2023, a unanimous quarter point that takes the funds rate to 3.75% to 4%. Sixteen of the eighteen officials who filed projections think at least one more is coming before the end of the year.

Warsh's answer on tools got far less coverage. After the decision he played down the funds rate and said he'd rather fight inflation with a smaller Fed balance sheet. That means the Fed holding fewer long-dated Treasuries, which are the same bonds the Treasury has been buying back since September 9 to keep long yields down.

The 30-year closed Friday at 5.33%, still close to its highest level in 19 years.

Gold rose 1.4% to $4,347 and silver did better, up 5.3%. That's a respectable week for the metals in the week of a rate hike, though gold is still below the $4,410 level we flagged on September 7. The pressure on it hasn't eased much. The 10-year traded above 5% for the first time since 2007, and that's the yield gold is competing against.

Bitcoin sat near $76,300 the day after the hike while the Dow dropped about 1.2%, and it has since climbed to $81,487, up 4.3% on the week. Ethereum gained 4.9%. The Contrarian section below explains why we'd be careful about reading too much into the rally.

Oil went above $100 during the week before falling back, and WTI finished at $98.07, down 4.4%. Diesel is still around $6 a gallon, and the Fed's statement pointed to energy as a main reason inflation is running hot. Rate hikes do little to energy prices, which is one reason most forecasters don't expect this cycle to run long.

A running record of the calls in this newsletter, including the ones that did not land.

Warsh wants a smaller balance sheet. That puts the Fed and the Treasury on opposite sides of the bond market.

By The Alternative Insider Research Team

Closing yields on September 18: two-year 4.75%, 10-year 5.01%, 30-year 5.33%. The long end barely moved after the hike.

Going into Wednesday, futures had a hike priced at better than 90%, and the committee delivered it without a dissent. The funds rate is now 3.75% to 4%. Sixteen of the eighteen officials who submitted projections expect at least one more increase this year, four of them expect two, and none pencil in hikes for the years after. Warsh doesn't submit a dot. At the press conference he said inflation had been too high for too long.

He also played down the funds rate as his main tool against inflation and said he'd prefer to shrink the Fed's balance sheet. He has argued for years that the balance sheet is too big, and he's now in a position to do something about it.

How the two tools differ

The funds rate is an overnight rate. It moves short-term borrowing costs and drags the two-year yield along with it, but its hold on the 10-year and 30-year is much weaker. The balance sheet works at the other end of the curve. The Fed still owns trillions of dollars of Treasuries from past crisis programs, and while it holds them it's a very large buyer of long-dated debt that never has to sell.

Shrinking that position means the Fed either lets bonds mature without replacing them or sells them. Either way, private investors end up holding more long-dated debt, and they generally want a higher yield before they'll take it. A chairman who prefers balance sheet reduction to repeated hikes is choosing to tighten through long rates rather than short ones.

The Treasury is working the other side of that market. Its buyback program started September 9 with a $6 billion operation and runs to November 4, and the point of it is to take long bonds out of circulation so their yields come down. If the Fed starts pushing more of those bonds back into private hands, the two programs work against each other.

What the long end did

The 10-year went above 5% early in the week for the first time since 2007, with crude over $100. It slipped back under 5% after the decision, and the 30-year eased slightly but stayed close to a 19-year high. Friday's close was 4.75% on the two-year, 5.01% on the 10-year and 5.33% on the 30-year.

Last week we said the 30-year's reaction to the hike would tell us more than the hike itself. A rise would have meant the market doubted the government's control over its borrowing costs. A drop would have meant the hike had bought the Fed some credibility. We got neither. The 30-year barely moved, so the question of who controls the long end is still open, and that's now the part of the curve Warsh says he wants to work on.

Bitcoin rallied after the first hike of this cycle. It did the same in March 2022.

The Fed began shrinking its balance sheet in June 2022, three months after the first hike of that cycle. Most of Bitcoin's decline that year came after it started.

Bitcoin traded near $76,300 the day after the hike while stocks fell, and it's up to $81,487 since. The view on most crypto desks is that the hike was priced in and the market got through it without much damage.

That may turn out to be right, but 2022 is worth remembering. The Fed's first hike of that cycle came on March 16, with Bitcoin around $41,000. It rallied to roughly $47,000 by the end of the month, and the same priced-in argument was everywhere. By November it was under $16,000.

The first hike wasn't what hurt that year. The Fed raised rates six more times and started shrinking its balance sheet in June, and that's when most of the losses came. A first hike is the most widely expected move in any cycle, so markets usually handle it calmly, and how they handle it says little about how the rest of the cycle goes.

This time the committee is already signaling more. Sixteen of eighteen officials project at least one more hike this year, and four see two. Odds of another increase by year end went to 87% after Warsh's press conference. And the chairman has now said he'd rather tighten through the balance sheet, which is what the Fed started doing in June 2022.

There are real differences. The Fed started 2022 at zero and raised rates faster than at any point in four decades, and the crypto sell-off that year was made worse by leverage and outright fraud inside the industry. Today's projections show no hikes after 2026. We're not predicting a 60% drop.

We'd just be wary of treating a good week as a verdict on the cycle. We made a similar call ourselves last week, when this section argued the two-year yield was pricing a single hike. The committee has since said it expects at least two.

Disclaimer: Alternative Insider News is a financial education and research publication. Nothing in this email constitutes investment advice, financial advice, or a recommendation to buy or sell any security or digital asset. We may earn affiliate commissions from partners mentioned in this newsletter. Always do your own due diligence before making any investment decision. Past performance is not indicative of future results. Cryptocurrency investments involve significant risk and may result in loss of capital.