That gap is the main macro story of the day as we head into Wednesday’s Federal Reserve (Fed) rate decision.
Citadel, one of the largest hedge funds in the U.S., managing $67 billion in assets, is calling for markets to brace for a 25-basis-point interest rate hike from Chair Kevin Warsh, not in September but later on Wednesday. That would lift the Fed’s benchmark borrowing cost to the 3.75%-4% range.
Meanwhile, both crypto and traditional market analysts expect no change. Crypto exchange Kraken’s economist Thomas Perfumo put it best: “The most likely outcome of July’s FOMC meeting is no change in interest rates.”
That tension is why a surprise rate hike Wednesday could send already buoyant Treasury yields higher, creating a headwind for risk assets, including bitcoin and the wider crypto market.
Note that while the consensus favors no change, the market isn’t entirely dismissing a hike. The CME Group’s FedWatch tool puts the odds of a rate increase at 35.8%, up from 25.7% just a week earlier. But “elevated tail risk” and “the base case” are two very different trades, and right now almost every desk on the Street is positioned for the base case.
Crypto is trading on a cautious note. The upswing in bitcoin, the leading digital asset by market value, has stalled since last Wednesday, with prices pulling back to just under $64,000 from the high of nearly $67,000.
July hike to end forward guidance
Citadel’s rate hike call is less about where the data land and more about tactics, specifically, why Warsh has more to gain from raising rates today than from waiting until September.
A surprise hike Wednesday, Frank Flight, head of macro strategy at Citadel Securities, writes, “would emphatically end the forward guidance era in which every policy move is pre-signaled and act as a cleansing event, forcing markets to price what the data imply the central bank should do rather than what they expect it will do.”
It would also “clearly underline Federal Reserve independence after two years in which it has been repeatedly questioned.”
Forward guidance is a tool central banks use to signal how they expect interest rates to evolve over the coming months, helping households and businesses adjust consumption, investment, and borrowing without sudden shocks.
Over time, however, forward guidance has, according to many, including Warsh, distorted the market’s reaction function to the point where assets began trading off expectations of how the Fed might respond to news and data, rather than on the underlying data itself.