Citadel's macro team says Wednesday's hike isn't about the data. It's about Warsh's best shot at making a surprise actually count before the market stops being surprised.
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| Citadel predicts a Fed rate hike on Wednesday. (Jesse Hamilton/CoinDesk) |
That gap is the main macro story of the day as we head into Wednesday's Federal Reserve (Fed) rate decision.
Citadel, one of the largest hedge funds in the U.S., managing $67 billion in assets, is calling for markets to brace for a 25-basis-point interest rate hike from Chair Kevin Warsh, not in September but later on Wednesday. That would lift the Fed's benchmark borrowing cost to the 3.75%-4% range.
Meanwhile, both crypto and traditional market analysts expect no change. Crypto exchange Kraken's economist Thomas Perfumo put it best: "The most likely outcome of July's FOMC meeting is no change in interest rates."
That tension is why a surprise rate hike Wednesday could send already buoyant Treasury yields higher, creating a headwind for risk assets, including bitcoin and the wider crypto market.
Note that while the consensus favors no change, the market isn't entirely dismissing a hike. The CME Group's FedWatch tool puts the odds of a rate increase at 35.8%, up from 25.7% just a week earlier. But "elevated tail risk" and "the base case" are two very different trades, and right now almost every desk on the Street is positioned for the base case.
Crypto is trading on a cautious note. The upswing in bitcoin, the leading digital asset by market value, has stalled since last Wednesday, with prices pulling back to just under $64,000 from the high of nearly $67,000.
July hike to end forward guidance
The note argues that the Fed's next move is a rate hike, as both markets and policymakers lean in that direction. CME's FedWatch shows the September hike is a near-done deal.
"If a majority of the FOMC is already likely to support a September hike, and if we are right that Warsh has much to gain by moving in July, it seems unlikely that voting members would oppose the Chair over acting six weeks earlier than they otherwise would," the note said.
This looks all the more plausible against the backdrop of the renewed oil price surge and lingering tensions with Iran, both of which risk adding further inflationary pressure to the global economy.
All things considered, Wednesday's Fed meeting is setting up to be the most interesting one in recent times.
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