Thursday’s expected 25 basis point Fed rate cut is likely to be a non-event.
Powell’s response to questions on President-elect Donald Trump’s inflationary policy stance will likely move markets.
For bitcoin (BTC) traders, Thursday’s Federal Reserve (Fed) rate decision will primarily focus on the central bank’s commentary, especially concerning the anticipated inflationary effects of President-elect Donald Trump’s promised policies, rather than the decision itself, which seems to be priced in.
Background
In September, the Fed delivered an outsized 50 basis points (bps) rate cut, kicking off the so-called liquidity easing cycle in a positive development for risk assets, including cryptocurrencies.
The Fed funds futures show expectations for a quarter-point rate cut on Thursday and a similar move in December, followed by a pause in January and multiple cuts through 2025.
The current target range of 4.75% to 5% for the Fed funds rate (benchmark borrowing cost) is well above the “neutral” level, estimated between 3%-3.5%. The consensus, therefore, is that the Fed has plenty of room to normalize the overly tight monetary policy with rate cuts, more so since the labor market cooled significantly in October.
The neutral level is the one where interest rates are neither restrictive nor expansionary.
Thursday’s rate cut priced in
The CME’s FedWatch tool shows traders assigning a nearly 100% chance of the Fed reducing the benchmark interest rate range to the 4.5%-4.7% range Thursday.
In other words, the 25 bps rate cut is already priced in and, by itself, could be a non-event.
Comments on Trump’s tariffs plan
The cooling of inflation in the U.S. this year has redirected the Fed’s focus on supporting the labor market by normalizing what has been an overtly restrictive monetary policy. However, Republican candidate Donald Trump’s victory in Tuesday’s presidential election might disrupt these plans and the market would love to hear what the Fed Chairman Jerome Powell thinks of it.
Trump has already secured the Senate, and potential control of the House will boost his ability to enact his poll promises – tax cuts and loose fiscal policy while implementing high import tariffs on major trading partners like China and Mexico. The economic plan will likely underpin inflation, potentially forcing the Fed to keep rates elevated.
During the post-rate decision press conference, Powell is likely to field questions about the election and possible inflation resurgence under Trump.
Bitcoin and other risk assets may see downside volatility if Powell expresses concerns about Trump’s proposed policies, forcing markets to reassess expectations for rate cuts in the coming months. The BTC rally will likely continue if Powell avoids commenting on the matter, reiterating the data-dependent stance.
BTC jumped to record highs above $75,000 Wednesday in hopes of friendlier regulatory policies under Trump presidency.
Fed to err on the side of caution
After misjudging the coronavirus-induced supply-push inflation as transitory in 2021, there is a strong possibility of the Fed slowing down its normalization in anticipation of large tariff increases.
“We think policymakers could err on the side of the caution by pausing the cutting cycle if large tariff increases are announced, Bank of America’s global research team said in a note to clients Tuesday.
“All else equal, we think further fiscal expansion means a higher terminal fed funds rate,” the research team added.
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