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Markets are now pricing in a strong chance that the Federal Reserve will cut interest rates at its December meeting. According to the CME FedWatch Tool, the probability of a 25 basis point rate cut has jumped to 71%, a significant increase from just a day ago.
This shift comes after the recent comments from New York Fed President John Williams, who signalled that a near-term rate cut is possible without threatening the Fed’s inflation goals.
Policy Too Restrictive?
Williams noted that monetary policy remains “modestly restrictive” and suggested that there is room to bring rates closer to a neutral stance. He also downplayed the impact of tariffs on inflation and expects price pressures to ease over time.
But not all Fed officials share this view.
Fed Officials Remain Split
Boston Fed President Susan Collins said on Friday that she believes the current monetary policy is appropriate given the economy’s resilience. She expressed hesitation about further rate cuts and described the current 3.75%-4% policy range as “mildly restrictive” and suitable for keeping some downward pressure on inflation.
Dallas Fed President Lorie Logan recommended keeping interest rates on hold for now, while the central bank assesses how the current monetary policy is affecting the economy.
Fed Governor Stephen Miran, who has pushed for larger half-point cuts in the past, said he would support a 25-basis-point reduction if his vote were the marginal vote.
Currently, the Fed’s target range for interest rates is 3.75% to 4.00%, and the chance of leaving rates unchanged has dropped to 29%.
Crypto Hopes Rise
This comes amidst a broader downturn in the crypto market, and traders and investors are hopeful that a rate cut could give Bitcoin and other digital assets a boost. The crypto community reacted positively to the rising odds, expecting that this could trigger a massive rally in digital assets.
However, some analysts have also urged caution. The U.S added more jobs than expected in September, but the higher unemployment rate and revised past data give the Fed a mixed signal on whether to cut rates further to support the labour market.
Fed Rate Cut Odds “Mispriced”
In a recent X post, Coinbase Institutional noted that while markets are leaning toward no rate cut, the odds for a rate cut are actually mispriced. It notes that the recent tariff research, private market data, and real-time inflation trends suggest otherwise.
Since the October FOMC meeting, futures shifted from expecting a 25bps cut to favouring a hold, mostly because of rising inflation concerns. But studies indicate that tariff increases can lower inflation and raise unemployment in the short term, acting like a brake on demand.
It notes that if tariffs are already tightening financial conditions and slowing demand, then the Fed may not need to stay hawkish, which could pave the way for larger rate cuts.
