Today, it is widely anticipated that the US Federal Reserve will cut interest rates for the first time since December 2024, when the FOMC decided to cut rates by 25 basis points. The bigger question is how much the Fed will cut and expectations for the coming months.
Fed observers predict there is over a 90% chance that benchmark rates will be reduced by 25 basis points. There are still a few outliers that anticipate, or want, a bigger cut of 50 bps, due to the slowing economy.
Prediction market Kalshi currently posts an 89% chance of a 25 bps cut and a 10% chance of a higher rate. Competitor Polymarket is about the same.
In the end, the Fed’s decision will be driven by its dual mandate of 2% inflation and full employment, but while inflation has been sticky, other data points like jobs are showing warning signs.
Samantha Bohbot, Partner and Chief Growth Officer at RockawayX – a blockchain VC and part of Czech-based Rockaway Capital, a European investment group established in 2013, speaks the truth that the most important part of the rate cut today will be Chairman Powell’s FedSpeak.
“High level, it’s been common for managers to derisk into FOMC, either by cutting length or hedging. Should the event go as expected, they put that risk back on. The market is pricing a 96% chance of a 25 bps rate cut, so that’s priced in. The most important thing will be the forward guidance around future rate cuts this year. A 25bps cut is mostly insignificant; however, the market will react significantly if the FED’s decision deviates from a 25bps cut,” says Bohbot, adding that the meeting today is more about Powell’s comments.
“The market is pricing two cuts on top of the September one (73% probability of 350 – 375 bos and lower by the year-end), so any hawkish comments might lead to repricing and sell off. In such an uncertain environment, it is often good to either accept the increased volatility for high conviction bets or decrease the investment exposure around the event. Decreasing exposure only introduces the opportunity cost of not being fully in the market in the case of a positive surprise. It also gives an investor more dry powder to deploy during the sell-off at a more reasonable price. We see the hedging with options as too costly, as the volatility is usually priced in.”
She expects that lower rates should boost liquidity and thus more risky assets may see a boost, including prices of the significant “blue-chip crypto assets such as BTC, ETH, and SOL, where BTC is the asset that is influenced by liquidity outlooks the most.”
We will know more this afternoon.