Fed Must Lean Dovish as US Govt Shutdown Continues, Rate Cut Odds Surge

The US government’s economic data blackout continues, with the shutdown entering day 23. There has been no September jobs report, any key inflation data, or initial jobless claims for weeks.

Additionally, the Fed has lost access to key private jobs data from ADP, covering 20% of private workers, reported the WSJ and Kobeissi Letter.

Impact On Crypto

The Fed will continue to cut rates aggressively in the wake of the data blackout and stagflation for one simple reason: “they are afraid of being ‘too late’.”

CME futures markets currently predict a 96.7% probability of a 25 basis point rate cut at the FOMC meeting on October 29. The likelihood of a further 0.25% cut in December has also surged to 96.5% and the odds of a third cut in January are almost 60%.

When the Fed cuts rates, traditional safe investments like savings accounts, Treasury bonds, and money market funds offer lower returns. This makes riskier assets like crypto more attractive by comparison, as Investors seeking higher yields are more likely to allocate capital to crypto when they’re earning minimal interest elsewhere.

Rate cuts also make borrowing cheaper, which puts more money into circulation throughout the financial system, increasing liquidity.

“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,” said economist  Raoul Pal, who added, “This too shall pass.”

The Senate failed to advance the House-passed funding bill that would end the government shutdown for the 12th time on Wednesday, which means the stalemate will continue.

Markets Begin to Consolidate

Crypto markets have not moved much over the past 24 hours, with total capitalization at $3.75 trillion. Bitcoin has traded in a tight range around the key $108,000 support-turned-resistance level and has struggled to break above it.

Ether prices remain suppressed, failing to reclaim $4,000 after a triple dip to $3,700, and altcoins continue to bleed out slowly.

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