Markets Expect Fed to Hold Rates as Bitcoin Traders Watch for December Hike
Key Takeaways
- •Futures and prediction markets price the odds of a rate hold at today's meeting above 90%, which would keep the federal funds target range at 3.75% to 4.00% following September's unanimous 12-0 increase, the central bank's first since 2023.
- •Consumer prices rose 3.7% in the 12 months through September while employers added just 29,000 jobs against forecasts of roughly 90,000, presenting the Fed with conflicting signals under its dual mandate.
- •Bitcoin traded around $80,700 below a resistance zone, and about $481 million in crypto positions were liquidated within 24 hours of Warsh's August Jackson Hole speech, illustrating how leverage can amplify volatility around Fed events.
- •Markets assign 75% to 80% odds to another quarter-point increase at the Fed's Dec. 8-9 meeting, which would lift the target range to 4.00% to 4.25%, and most September meeting officials viewed a year-end hike as likely appropriate.
- •A dissent favoring tighter policy in today's vote, following July's 9-3 tally with three members supporting a hike, would suggest that a December rate increase is becoming more likely.
The Federal Reserve is scheduled to announce its interest-rate decision at 2 p.m. ET today, followed by a press conference with Chair Kevin Warsh. Futures and prediction markets put the probability of a rate hold above 90%, suggesting traders expect no change at this meeting.
The federal funds target range is currently 3.75% to 4.00%, after the Fed raised rates in September in a unanimous 12-0 vote. It was the central bank’s first rate increase since 2023. The CME FedWatch tool, which converts interest-rate futures prices into probabilities, places the odds of a hold above 90%, while prediction markets price the probability slightly higher.
The decision affects more than financial markets. The federal funds rate, the rate banks charge one another for overnight loans, provides a baseline for borrowing costs on consumer loans and credit cards.
Inflation remains elevated. Consumer prices rose 3.7% in the 12 months through September, according to the Labor Department, while gasoline prices increased 9.1% during the month. At the same time, labor-market growth has slowed. Employers added 29,000 jobs in September, compared with forecasts of about 90,000, and the unemployment rate was 4.2%. The Fed sets policy under a mandate covering both price stability and maximum employment, which is why the inflation and jobs reports both factor into its rate decisions.
Oil prices are another source of inflationary pressure. Crude is trading near $100 a barrel as the U.S.-Iran war has squeezed global supply. Higher oil prices raise gasoline and shipping costs, which can eventually increase prices for goods including groceries.
Elevated inflation can also push investors to demand higher returns for lending to the U.S. government, lifting Treasury yields. The 10-year Treasury yield, a benchmark for mortgage rates, is hovering around 5% after reaching 5.31% on Oct. 5, according to Treasury data. That provides a relatively low-risk return without exposure to volatile assets.
Bitcoin does not generate yield and is highly volatile, so higher Treasury returns can make crypto and stocks less attractive to some traditional investors. Bitcoin was trading around $80,700, just below a price zone that has shifted from support to resistance after sellers repeatedly halted rallies this year.
Leverage, or borrowed money used to increase the size of a trade, can magnify price moves around Federal Reserve decisions. When prices move against leveraged traders, exchanges can automatically close their positions in liquidations, adding to selling pressure. After Warsh’s speech at Jackson Hole in August — the Kansas City Fed’s annual policy symposium — about $481 million in crypto positions were liquidated within 24 hours, including more than $360 million in bets on higher prices.
Attention is now turning to the Fed’s Dec. 8-9 meeting. Futures and prediction markets assign 75% to 80% odds to another quarter-point rate increase, which would lift the target range to 4.00% to 4.25%. Minutes from the September meeting showed that most officials believed another increase would likely be appropriate by year-end, while several said the current rate was “not restrictive or only mildly restrictive.”
Analysts have described the expected outcome as a “hawkish hold”: rates remain unchanged, but the Fed’s language leaves further increases under consideration. When asked in September whether more hikes would follow, Warsh said, “I’m not going to prejudge any future decisions we make.” He also told reporters, “This won’t surprise you: I’m not in the forward guidance business,” indicating that he would not signal future policy moves.
Dissents, or votes against the majority, may provide the clearest indication of the Fed’s stance. The July vote was 9-3, with three members favoring a rate increase. A dissent in favor of tighter policy at this meeting would suggest that a December hike is becoming more likely. Beyond the vote tally, Warsh’s press conference after the announcement is the other scheduled checkpoint for traders.
The Fed will not publish new economic projections at this meeting. Those projections are scheduled for December.
Source: Decrypt.
