With Fed rate hike all but assured, here's how markets might react

The Federal Reserve looks increasingly likely to raise rates next week after the hot core CPI reading Friday. Markets have had plenty of time to prepare, which now raises the question of whether a hike will have much bite.

Core CPI rose 0.3% in August, above the 0.2% economists expected. Headline inflation rose 0.4% on the month and 3.4% from a year earlier, both in line with forecasts.

The report followed hotter producer-price data earlier in the week and came a day after the European Central Bank raised rates. Bank of America expects the Fed to follow with a 25-basis-point increase next week, with another 50 basis points of tightening by year-end.

Fitch Ratings’ Olu Sonola said the latest inflation data make it “increasingly difficult to justify a pause.”

Bitcoin, though, rose following the report, currently at $78,600, up 1.5% over the past 24 hours.

Joel Kruger, global markets strategist at LMAX Group, said traders were already leaning toward a hike before the CPI numbers landed.

“A good deal of the hawkish risk is arguably priced in,” Kruger said.

That could leave markets with a relatively muted response if the Fed does what everyone expects. The bigger move may come if the central bank refrains from raising rates.

“We see greater potential for an outsized move in risk assets to the topside should the Fed ultimately fail to deliver on these hawkish expectations,” Kruger said.

Matt Mena, senior crypto research strategist at 21Shares, doesn't see a hike as an automatic problem for bitcoin. He said bitcoin has gained an average 2.13% over the 30 days following hotter-than-expected core CPI readings.

Mena also pointed to gains in ether ETH$2,485.60 and solana (SOL) as a sign that traders haven't backed away from crypto risk.

“That's due to inflation and credibility issues,” Risk Dimensions CIO Mark Connors said, noting the rise in bitcoin and gold following this morning’s data. Connors had previously argued that softer measures of inflation could give Fed Chair Kevin Warsh room to hold rates. Friday’s data changed the picture.