Fed Meeting Kicks Off: What to Expect and Market Reaction

The Federal Open Market Committee (FOMC) kicked off a high stakes closed door meeting on October 27, at 9.30 AM ET regarding interest rates and policy statements. An official announcement is expected tomorrow (October 28 at 2.00 PM ET).

Meanwhile, crypto and legacy markets have reacted to Wall Street expectations regarding interest rates. Here are the details:

The great Fed interest rate dilemma

The Fed is currently facing a predicament of matching interest rates in a relevant manner to the growing inflation.

Two economic indices: the Consumer Price Index (CPI) and the Core PCE Price Index show inflation rate at 3.7% and 3.0%, respectively. Average 30-year fixed mortgages also recently hit a 3-year high of 7.4% before slightly easing back to 7.32%.

With the Fed’s long-term inflation target at 2.0%, the agency is now faced with the formidable challenge of enforcing policies that bring it closer to its goal. Other than community pushback on high interest rates, several reasons make such a move an uphill battle. 

With just six days left before the US midterm elections, voter sentiment is highly focused on affordability. This is also the fourth meeting under Fed Chair Kevin Warsh and onlookers are keen to determine his independence from regime control.

Wall Street expectations for Fed interest rates

For the above reasons, Wall Street analysts are 93% confident that the Fed will maintain the current benchmark interest of 3.75% – 4.00%.

Source: CME FedWatch Tool

However, experts from Deutsche Bank and other prominent firms say this neutrality will likely be short-lived. They expect Warsh to communicate a high likelihood of a December 25 basis points (bps) rate hike to keep inflation in check. Here, the odds of a hawkish policy shift to 75.1% against 24.9% chance of extended neutrality.

Crypto and traditional market reaction

Amid expectations of interest rates remain flat, the S&P 500 and the Nasdaq Composite Index closed today with gains of 0.6% and 1.18% respectively. Meanwhile, the 10-year Treasury yield fell to 4.979%, pulling back slightly from the 5% threshold crossed earlier. Similarly, the 2-year yield dropped from a morning high of 4.735% to 4.703%.

As for the crypto market, Bitcoin has risen 1.05% in the day to regain the $80,000 mark once again. The asset also shows strong 88% correlation for both the S&P 500 and gold, indicating rates-drive momentum.