US Fed Set for New Rate Hike This Week, But How Aggressive Will It Be?

The US Federal Reserve (Fed) is set to announce another significant interest rate hike on Wednesday this week, and crypto market participants are watching closely for any clues about how aggressively the Fed will move.

Judging from the derivative exchange CME’s FedWatch Tool, traders are generally expecting the Fed to raise rates by 75 basis points, with a 77.5% probability of this outcome. However, that also means that the market prices in a 22.5% probability that the Fed will raise rates by 100 basis points – a hike described by Bloomberg as the “largest increase of the modern Fed era.”

The possibility of a 100-basis point hike has come into focus recently, given the increasingly hot inflation numbers in the US. Earlier this month, data showed that inflation reached 9.1% in June, more than analysts had expected and up from 8.6% a month earlier.

Still, the latest inflation report did lead to a relief rally of sorts for the crypto market, with bitcoin (BTC) having risen by close to 14% since the latest inflation report came out on July 13.

BTC price since the June US inflation report:

According to the Singapore-based crypto trading firm QCP Capital, a 100-basis point hike by the Fed is unlikely to happen given that inflation “is showing signs of peaking.” The firm also said that a mini-rally can be expected as the broader market realizes this.

“Since the high [inflation] print, the market has been decisively pricing out the probability of a 100 bps hike in the July [Fed meeting]. Currently, a 20% chance of 100 bps is still being priced in but our view is that 75 bps is the most the Fed will do. So expect another boost as 100 bps gets completely priced out,” the firm wrote in an update on Telegram before the weekend.

Meanwhile, the Wall Street Journal on Monday reported that so-called overnight index swaps now indicate an expectation in the market that the Fed will raise rates aggressively until the end of the year, before turning around next year and starting to cut them by June.

The same data also indicated that the Fed will raise rates by 75 basis points at its meeting this week, with the Federal Funds rate expected to be at around 3.3% by the end of the year.

The predicted turn-around in Fed policy has “marveled” even investors themselves, the report said. “From an expectation standpoint it’s not been at an extreme like this,” the report cited Jim Caron, a senior portfolio manager at investment bank Morgan Stanley, as saying.

At 12:18 UTC on Monday, BTC traded at USD 22,928, down 3.7% in a day and up 5.3% in a week.