Bitcoin’s Low Volatility May Underprice Fed Rate Cut Odds

Bitcoin’s price action has been remarkably subdued, trading within a narrow band between $90,000 and $94,000 for nearly two months. According to CoinGecko data, the top cryptocurrency was recently down 1.2% over 24 hours, trading around $91,150. More telling than the flat price is the behavior of Bitcoin’s Implied Volatility Index, a key gauge of expected price swings. This index is hovering near 43, sitting at the extreme lows of its multi-year range. This low volatility signal indicates that traders and the broader market are not anticipating any major near-term catalyst, reflecting a state of complacency that analysts believe may be a significant mispricing.

This market calm is directly linked to expectations surrounding Federal Reserve policy. Quinn Thompson, CIO of Lekker Capital, articulated this view, noting on social media that risk around the upcoming Consumer Price Index (CPI) report “feels a bit asymmetric.” He pointed to market expectations that currently price in only a roughly 75% chance of a single interest rate cut before the midterm elections, a probability he and others consider too low. The core thesis, echoed by multiple experts, is that the market is underpricing the potential for a shift in monetary policy, leaving Bitcoin and other risk assets potentially mispriced ahead of critical data.

The debate centers on the probability of a Federal Reserve rate cut as soon as January. The CME FedWatch Tool, a widely monitored benchmark, currently assigns just a 5% chance to a cut at the January 28 meeting. However, analysts like Sean Dawson, head of research at Derive, argue this is a significant underestimation. “In my head, the odds are at least 10%,” Dawson told Decrypt. This discrepancy stems from conflicting and distorted macroeconomic signals. On one hand, U.S. job growth in December was reported at only 50,000, marking the worst annual growth since 2003. On the other, core inflation remains stubbornly elevated near 2.6%, above the Fed’s 2% target.

These figures are complicated by external factors such as recent tariffs and last year’s government shutdown, which have clouded the economic picture. This ambiguity makes today’s CPI report a pivotal event. A soft inflation reading could force a rapid reassessment of the Fed’s path, catching a complacent market off guard. The setup, as described by analysts, is asymmetric: while persistent inflation may simply prolong Bitcoin’s sideways trading, a softer-than-expected print could trigger a violent unwinding of dovish bets, potentially sparking a sharp rally in Bitcoin as capital flows into risk assets.

Compounding the economic uncertainty is an unprecedented layer of political pressure on the Federal Reserve. Analysts highlight the Department of Justice’s criminal lawsuit against Fed Chair Jerome Powell as a watershed moment. Derek Lim, head of research at crypto market-making firm Caladan, told Decrypt that the charges against Powell demonstrate that the administration is “willing to go after any Fed member who does not agree with his rate cut views.” Lim emphasized the gravity of the situation, stating, “The government attempting to control the Fed is something that is unprecedented.”

This political dynamic introduces a new variable into monetary policy forecasts. The appointment of Stephen Miran, a new Federal Reserve appointee aligned with the administration’s views, is seen as further positioning to influence the central bank’s decisions. This environment of direct pressure challenges the traditional notion of Fed independence and adds weight to the argument that markets may be too dismissive of the potential for an accelerated or politically motivated shift toward rate cuts. For Bitcoin, a asset often sensitive to liquidity expectations, this political backdrop amplifies the risk that current calm volatility metrics are masking a potent catalyst for movement.