Unexpected Fed Decision on Oct. 29: A Potential Shockwave for U.S. Stocks and Crypto Markets

Fed’s October Meeting: A Crossroads for Markets Amid Uncertainty

As the Federal Reserve’s October 28-29 meeting approaches, investors are on edge. The looming decision on interest rates could send shockwaves through U.S. stock markets and the cryptocurrency sphere, particularly Bitcoin. This anxiety is exacerbated by a partial federal government shutdown that has thrown a wrench into the Fed’s data-driven decision-making process.

Government Shutdown Clouds Economic Outlook

The shutdown, which began on October 1, has shuttered non-essential services, including the Bureau of Labor Statistics (BLS). With BLS employees furloughed, the September jobs report—a key indicator for assessing the labor market’s health—remains indefinitely delayed. This data gap leaves Federal Open Market Committee (FOMC) members without critical insights as they prepare to announce the Fed’s next interest rate decision.

Despite these disruptions, market optimism hasn’t wavered. Gold has surged, closing at $3,886 per ounce last Friday, marking a 48% gain year-to-date. This rally reflects global inflation concerns, large central bank purchases, and investor demand amid geopolitical tensions and efforts by countries like the BRICS members to reduce reliance on U.S. dollar assets.

Bitcoin, too, is riding high. According to CoinDesk, it was trading around $123,196, close to its all-time high of $125,506. This surge is driven by strong institutional interest and crypto ETF inflows. Meanwhile, the Dow Jones Industrial Average and S&P 500 have also reached record highs, buoyed by expectations of continued rate cuts and a strong market confidence in Fed policy transitions.

Market’s Rate Cut Expectations

The prevailing market sentiment is overwhelmingly in favor of a 25 basis-point interest rate cut at the upcoming FOMC meeting. The CME Group’s FedWatch Tool places the odds of this cut at 96.2%, while Polymarket prediction platform suggests a 90% probability of a 25 basis-point increase. The anticipation of easing monetary policy has kept markets buoyant, as investors brace for further rate cuts to counter global inflationary pressures.

The Case for a Fed Pause

However, the scenario of a Fed pause isn’t as far-fetched as it seems. The absence of timely labor market data due to the shutdown presents a significant challenge. Without updated wage and employment figures, the Fed risks making a decision without a full economic picture. This uncertainty could prompt some FOMC members to advocate for holding off on further cuts, a cautious approach taken by the Fed during past data scarcities.

The government shutdown itself poses additional risks. Furloughed federal workers and potential permanent job losses could dampen economic growth, though the extent remains unclear. With many investors already positioned for a rate cut, a surprise pause could unsettle markets, triggering volatility that the FOMC would prefer to avoid.

Navigating Economic Signals Amid Shutdown

In the absence of BLS data, the Fed will rely on private-sector and Federal Reserve regional data releases for economic insights. If these indicators suggest cooling inflation and moderated growth, Fed Chair Jerome Powell might proceed with the expected 25 basis-point cut. Conversely, signs of persistent inflation or robust growth could push the Fed toward a pause, defying market expectations and potentially increasing volatility.

Should the shutdown conclude by mid-October, the delayed September jobs report might be released before the FOMC meeting, offering a clearer data-driven path for the Fed’s decision and potentially aligning with market expectations.

Why a 50 Basis-Point Cut is Unlikely

A 50 basis-point rate cut remains off the table for most market analysts. Inflation continues to exceed the Fed’s 2% target, especially in the services sector, where wage pressures persist. Such a large cut could signal premature easing, destabilizing labor market and inflation expectations. Powell’s public statements emphasize caution and data dependency, making a modest 25 basis-point cut the more likely outcome.

Protecting Against a Fed Pause

With the potential for a policy pause not fully priced in by the markets, investors, especially in the crypto space, should consider hedging their risks. Strategies include:

• Purchasing put options on Bitcoin and major stock indices to guard against significant downturns.
• Reducing high leverage or adjusting position sizes in volatile assets to mitigate potential drawdowns.
• Increasing exposure to safe havens like gold or Treasury bonds, providing portfolio stability during market stress.
• Utilizing volatility ETFs or funds to benefit from sudden spikes in market volatility.

Institutional investors frequently employ such strategies, and retail investors now have access to a growing array of low-cost tools to prepare for unexpected market shifts.

As October 29 approaches, the Fed’s decision will be closely watched, with the potential to either reinforce current market confidence or introduce new waves of uncertainty. Investors should remain vigilant, prepared to adapt to whatever path the Fed ultimately chooses.