Citadel bets on Fed rate hike Wednesday as bitcoin analysts call a hold
In brief
- Citadel expects 25bp Fed rate hike Wednesday, lifting benchmark to 3.75%-4%
- Crypto economists and market analysts expect no change at July FOMC meeting
- CME FedWatch odds of hike jumped to 35.8% from 25.7% last week
- Bitcoin pulled back to under $64,000 from $67,000 high since last Wednesday
- Citadel argues surprise hike would reset pricing before economy slows
The consensus call
Crypto exchange Kraken's economist Thomas Perfumo put it plainly: "The most likely outcome of July's FOMC meeting is no change in interest rates." Yet the CME Group's FedWatch tool puts the odds of a rate increase at 35.8%, up from 25.7% just a week earlier. Someone will be wrong.
The disconnect matters for bitcoin. Bitcoin prices have stalled since last Wednesday, pulling back to just under $64,000 from a high of nearly $67,000. Rate uncertainty tends to freeze risk-on assets.
Citadel's macro case
Citadel's argument isn't about the data. It's about signaling. Frank Flight, head of macro strategy at Citadel Securities, argues that a surprise hike Wednesday would emphatically end the forward guidance era in which every policy move is pre-signaled. It would also clearly underline Federal Reserve independence after two years in which it has been repeatedly questioned.
Forward guidance is a tool central banks use to signal how they expect interest rates to evolve over coming months. Citadel's deeper argument is about behavior, not optics. A surprise hike can reset how firms set prices and workers negotiate wages before the economy slows. If Warsh waits until September, the move would look like the same old playbook and carry far less informational force. CME's FedWatch shows the September hike is a near-done deal.
The backdrop
This looks all the more plausible against the backdrop of renewed oil price surge and lingering tensions with Iran, which risk adding further inflationary pressure to the global economy. Warsh's window to act is narrow. Wednesday is his best shot at a move that actually surprises the market before the market stops being surprised at all.
"If Chair Warsh waits until September, he risks muting the impact because by then the move would look like the same old pre-signaled playbook and carry far less informational force." — Frank Flight, head of macro strategy at Citadel Securities
