Ahead of the Federal Reserve's interest rate decision, the prevailing market consensus was for rates to remain unchanged this week, but Citadel has made the opposite bet. The firm believes the Fed may unexpectedly raise rates by 25 basis points on Wednesday, which, if implemented, could further push up US Treasury yields and put pressure on risk assets such as Bitcoin.
Currently, most traditional and crypto market analysts still expect the federal funds rate to remain unchanged. Kraken economist Thomas Perfumo also stated that the most likely outcome of the July FOMC meeting is no rate adjustment. However, the market has not completely ruled out the possibility of a rate hike. The CME FedWatch tool shows that the probability of a rate hike has risen to 35.8%, up from 25.7% a week ago.
Bitcoin's recent trend has weakened.
The crypto market is behaving cautiously ahead of the interest rate decision. Bitcoin has retreated after hitting nearly $67,000 last week, with the latest price below $64,000, indicating a slowdown in its short-term upward momentum. If the Federal Reserve unexpectedly tightens policy, risk appetite could cool further.
Citadel believes the key to this assessment lies not in the latest economic data, but in the timing. Their macro team argues that if Federal Reserve Chairman Kevin Warsh chooses to act now, rather than waiting until September, there is a greater chance of influencing market pricing through a "surprise move."
Citadel emphasizes the timing of unexpected interest rate hikes.
Frank Flight, head of macro strategy at Citadel Securities, stated in a report that a rate hike on Wednesday would mean the Federal Reserve is reducing its past reliance on forward guidance. The market will then have to re-price based on economic data itself, rather than on expectations of the Fed's communication path.
The agency also believes that such a move would help strengthen the Federal Reserve's independence. Over the past two years, there has been increasing skepticism regarding its policy judgments and independence. A sudden rate hike when market expectations remain unchanged would send a more direct policy signal.
September expectations are already rising.
Citadel further argues that the sooner a surprise tightening policy impacts corporate pricing and wage negotiations, the less likely subsequent tightening will be necessary. If action is delayed until September, the market will have already priced in the policy, significantly reducing its impact.
The logic is also based on the premise that the market and policymakers already have strong expectations for the next rate hike. If most Federal Open Market Committee members already favor a September rate hike, then acting six weeks earlier might not necessarily encounter strong opposition.
The article also mentions that rising oil prices and ongoing tensions related to Iran may continue to put upward pressure on global inflation, providing a backdrop for an earlier interest rate hike. For the crypto market, the key to Wednesday's meeting is not just whether or not interest rates will be raised, but also how the Federal Reserve describes its future path.
