A day before the Federal Reserve's July interest rate meeting, market traders significantly increased their bets on a rate hike. Unlike the previous consensus of "holding rates steady," market expectations for an unexpected 25 basis point rate hike have risen rapidly in the past 24 hours.

Predicting a shift in market betting

On Polymarket, the probability of contracts indicating "interest rates will remain unchanged" fell by 8.9 percentage points in the past 24 hours to 73.25%, while the probability of "a 25 basis point rate hike" rose by 9.7 percentage points to 26.65%. The total trading volume of related contracts in this market reached $100.83 million, with $5.78 million traded in the past 24 hours.

Myriad, operated by Dastan, the parent company of Decrypt, also saw similar changes. The platform showed approximately 74% of respondents expecting no change and approximately 27% expecting a rate hike. The probability of no change decreased by about 9% intraday, while the probability of a rate hike increased by about 8%.

Interest rate futures offer a higher probability

Compared to prediction markets, professional interest rate traders tend to price rates more cautiously. On Monday afternoon, federal funds rate futures indicated a probability of approximately 37.6% to 38.8% for the Federal Reserve's rate hike. This means that traditional interest rate markets are pricing in a higher probability of a rate hike than on-chain prediction markets.

25 basis points equates to 0.25 percentage points. If the Federal Reserve raises interest rates this week, the target range for the federal funds rate will be revised upward from the current 3.50% to 3.75% to 3.75% to 4.00%.

Risk assets focus on meeting results

Interest rate hikes typically increase borrowing costs and suppress spending, investment, and risk appetite, thus often putting pressure on risk assets such as Bitcoin and tech stocks. Conversely, interest rate cuts or a more accommodative policy environment are generally more favorable for the performance of highly volatile assets.

The Federal Reserve kept interest rates unchanged in June, stating that inflation remained high. Officials at the time had a median year-end interest rate forecast of 3.8%. However, inflation fell to 3.5% in June from 4.2% in May, giving policymakers reason to continue their wait-and-see approach.

The Federal Open Market Committee will meet on July 28-29 and announce its interest rate decision at 2 p.m. Eastern Time on July 29.