Is the probability of a rate hike only 16%? Economists vehemently disagree: It's 50/50. Will the Fed surprise or scare the market next week?

Author: Zeno; Editor: Zeno

With only a few days left until the Federal Reserve's October policy meeting (October 27-28), the market has officially entered a "silent period." But beneath the calm surface, undercurrents are surging: the interest rate futures market is proclaiming a "16% probability of a rate hike," while Wall Street economists are frantically warning – "It's a 50/50 chance! Extremely uncertain!"

With persistent inflation and the upcoming midterm elections in November, what will the Federal Reserve do next week? This will not only affect the US stock market, but will also directly determine the liquidity trend of global risk assets (including the crypto market) at the end of the year.

I. Market Expectations vs. Wall Street Warnings:

Is the 16% probability an illusion?

For weeks, investors have been betting that the Federal Reserve will keep interest rates unchanged at its meeting next week. However, the latest inflation data has shattered this optimism.

Resurgence of inflation has made Federal Reserve officials hesitant to make definitive statements. Ethan Harris, former chief economist at Bank of America Securities, bluntly stated, "I think the probability of a rate hike is fifty-fifty."

It's important to remember that the Federal Reserve just implemented its first interest rate hike in three years in September (reversing its previous path of rate cuts), originally aiming for a "limited rate hike" to strengthen its efforts to curb inflation. However, the better-than-expected inflation data in September completely changed the game. As Matthew Martin, an economist at Oxford Economics, stated, "The October meeting is uncertain; we expect the Fed to raise rates in October and December."

II. Two "Desperate Paths" Facing the Federal Reserve

Currently, Federal Reserve Chairman Jerome Powell remains neutral and has refused to reveal any cards to play. However, market analysts point out that the Fed is currently facing two very different choices:

Path 1: Aggressive Approach (25 basis points of interest rate hikes in October and December)

• Reason: A swift and decisive move is necessary. The current interest rate range of 3.75% to 4% is simply insufficient to suppress downward economic pressure. More importantly, non-energy commodity prices (consumer goods up 3.7%, producer wholesale inflation 6.3%) are accelerating, necessitating a rapid interest rate hike to maintain the Federal Reserve's credibility in "fighting inflation."

Path Two: Gradual Approach (Hold rates steady in October, then raise rates in December and March of next year)

• Reason: To avoid political minefields. The US midterm elections are on November 3rd, and raising interest rates at this crucial juncture is highly likely to be accused of being "politically motivated." Furthermore, some officials still believe that raising interest rates is not necessary to be so urgent.

Third, the margin for error is rapidly narrowing, leaving the Federal Reserve in a difficult position.

Regardless of which path they choose, the Federal Reserve faces immense pressure.

Bank of America's global head of research pointed out that pausing rate hikes in October would give the Federal Reserve more time to assess the data, but at the cost of the risk of policy lag. Meanwhile, Stifel Financial's chief economist said that if a rate hike is forced in October, it will send a signal of "high concern" about inflation, directly putting huge downward pressure on the market and interest rates.

This is definitely a weekend for the crypto market to buckle up. If the Federal Reserve chooses to "aggressively raise interest rates," the dollar index may strengthen, which will have a draining effect on risk assets such as BTC in the short term; if it chooses to "hold steady," it may be interpreted by the market as a compromise on inflation, triggering long-term uncertainty concerns.

How will this battle against inflation unfold next week? Koala Finance will keep you on the move!

Source:Global Cybersecurity Alliance (GCSA)
Website:www.gcsa.org