Fed Rate Cut Odds Surge Amid US Government Shutdown

The US government shutdown has entered day 23, creating an unprecedented economic information vacuum that has left the Federal Reserve flying blind. Critical data releases including the September jobs report, inflation figures, and weekly initial jobless claims have been suspended indefinitely. According to reports from the Wall Street Journal and Kobeissi Letter, the Fed has also lost access to ADP’s private employment data, which covers approximately 20% of American private sector workers.

This data blackout has dramatically shifted market expectations for Federal Reserve policy. As the Kobeissi Letter noted, “The Fed must lean even more dovish as the government shutdown continues, and they must cut rates.” The analysis suggests the central bank fears being “too late” to respond to economic conditions, particularly given concerns about stagflation. Market indicators now reflect this sentiment, with CME futures markets pricing in a 96.7% probability of a 25 basis point rate cut at the October 29 FOMC meeting.

The momentum for monetary easing extends well beyond October. CME futures data reveals a 96.5% likelihood of a second 25 basis point cut in December, with odds of a third consecutive cut in January approaching 60%. This represents a dramatic shift in market expectations, reflecting growing consensus that the Fed will embark on an aggressive easing cycle.

The rationale behind this anticipated policy pivot stems from the Fed’s perceived need to act preemptively amid the information vacuum. Without access to traditional economic indicators, policymakers appear inclined toward caution, opting to stimulate rather than risk economic contraction. The Kobeissi Letter specifically highlighted that “odds of a 50 basis point rate cut by year-end are surging,” indicating market expectations for more substantial intervention.

Federal Reserve rate cuts traditionally create favorable conditions for risk assets like cryptocurrencies. When the central bank lowers rates, traditional safe investments including savings accounts, Treasury bonds, and money market funds offer diminished returns. This dynamic typically drives investors toward higher-yielding alternatives, with cryptocurrency markets standing to benefit significantly from this capital rotation.

Analyst ‘cryptobirb’ noted the seasonal patterns that could amplify this effect: “Many traders look back at positive Q4 performance, anticipating repetition, so they buy, and the price goes up.” The analyst added that despite recent market turbulence, “the recent [leverage flush] crisis shouldn’t cancel year-end run,” suggesting underlying optimism about cryptocurrency performance through year-end.

Beyond the search for yield, rate cuts also increase systemic liquidity by making borrowing cheaper, potentially funneling more capital into speculative assets. However, the current government shutdown has created temporary liquidity constraints that have muted immediate market reactions.

Despite the bullish implications of anticipated rate cuts, cryptocurrency markets have shown limited movement in recent sessions. Total market capitalization remains at approximately $3.75 trillion, with Bitcoin trading in a tight range around the critical $108,000 level that has transformed from support to resistance. Ethereum has similarly struggled, failing to reclaim the $4,000 threshold after triple-dipping to $3,700, while altcoins continue their gradual decline.

Economist Raoul Pal explained this apparent contradiction through liquidity mechanics: “The government shutdown has halted the drain of the TGA (Treasury General Account) and No RRP (Reverse Repo Facility) to drain [which means] less liquidity (temporarily) [leading to] sloppy crypto as the pointy end of the liquidity spear.” Pal characterized this as a temporary phenomenon, adding “This too shall pass,” suggesting that once normal government operations resume, liquidity conditions should improve.

The political stalemate shows no immediate signs of resolution. The Senate failed for the twelfth time to advance the House-passed funding bill on Wednesday, ensuring the government shutdown and associated economic data blackout will continue. This prolongs the uncertainty that has characterized recent market behavior, creating a holding pattern until either political resolution or Fed action provides clearer direction.