Markets inherently dislike unpredictability. However, within a span of just a few days, established certainties have dramatically shifted. The probability of the Federal Reserve implementing a rate cut in December, which was previously the prevailing view, has now fallen below 50%. This sudden alteration in market expectations has reignited tensions across all asset classes. For the cryptocurrency ecosystem, which has already been navigating a challenging corrective phase, this resurgence of uncertainty is acting as a significant catalyst for increased volatility.
Key Market Developments
- •The probability of a rate cut by the Federal Reserve in December has decreased to 45.9%, a notable drop from 67% recorded in early November.
- •This abrupt reversal in expectations is contributing to heightened uncertainty in financial markets and is further weakening the crypto market's position.
- •The crypto market, which had previously factored in anticipated rate cuts, is now facing a scenario where there is no clear short-term monetary catalyst to provide support.
- •A potential decline in liquidity and tightened interest rate expectations could lead to an extended period of stagnation within the crypto market.
Markets Adjust Expectations Downwards
The prospect of monetary easing in December had appeared likely in early November. However, within a short period, this consensus rapidly eroded. The probability of a Fed rate cut in December has now fallen below 50%, a trend reversal that is beginning to concern market participants.
Key facts contributing to this shift include:
- •According to CME Group data, 67% of investors had anticipated a 25 basis point cut at the December FOMC meeting. This probability has since decreased to 45.9%.
- •This reversal is attributed to a deterioration in market sentiment and a more cautious assessment of economic prospects by the Federal Reserve.
- •Fed Chair Jerome Powell tempered expectations for swift easing, stating in October that "an additional reduction of the policy rate at the December meeting is not guaranteed, far from it. Monetary policy is not on a predetermined path."
Powell's statement reinforces the possibility that the Fed might maintain higher interest rates for an extended period, particularly if economic indicators continue to show strength. Ray Dalio, founder of Bridgewater Associates, has voiced concerns about the Fed's current strategy, suggesting that "the Fed is stimulating the economy in a bubble context, which is typical of over-indebted economies near hyperinflation and monetary collapse."
This economic context amplifies concerns about a potentially miscalibrated monetary policy, especially when confronting an American economy characterized by historically high asset prices, low unemployment rates, and tight credit spreads.
These on-chain data points are instrumental in reorienting investor expectations, as a rate cut is no longer considered a central short-term scenario. Financial markets, including the cryptocurrency sector, are now in the process of adjusting their positions amidst this heightened uncertainty.
Crypto Market Faces Headwinds from Lack of Monetary Catalyst
While the crypto market had largely priced in the potential for a rate cut, it did not translate into a positive impact on prices. On the contrary, the downward trend has continued, as evidenced by the performance of major cryptocurrencies in recent weeks.
According to Matt Mena, an analyst at 21Shares, the anticipated rate cut was fully factored in by investors, which explains the absence of a bullish reaction upon its announcement. This phenomenon suggests a waning momentum within the crypto ecosystem, which is currently lacking a clear short-term monetary driver.
The diminished likelihood of further monetary easing in December exacerbates this sense of stagnation. Reduced potential liquidity translates to less capital flowing into riskier assets like cryptocurrencies, further pressuring already weakened prices.
In this environment, the absence of a rate cut in December could extend the current consolidation phase, requiring investors to await clearer signals from central bankers. Although analysts at Goldman Sachs and Citigroup continue to anticipate three rate cuts in 2025, this outlook remains distant for markets seeking immediate support.
In the immediate short term, investors must navigate a less favorable environment than anticipated, characterized by scarce monetary catalysts and prevailing uncertainty. In the absence of an employment report due to the shutdown, the Fed's cautious stance regarding inflation and macroeconomic imbalances suggests a period where patience will be required. For the cryptocurrency market, this likely signifies a few more weeks, or potentially months, without a strong upward impetus.