Bitcoin Price Volatility Likely to Stay Depressed After Fed Rate Decision

Volatility, or the degree of price turbulence, in bitcoin (BTC) remains suppressed, consistent with the calm in the U.S. stock and bond markets. The low volatility regime will likely continue after Wednesday's Federal Reserve (Fed) rate decision, according to some crypto traders.

The Fed will announce the rate decision on Wednesday at 14:00 ET accompanied by a statement, the Summary of Economic Projections, and a new "dot plot" of interest-rate estimates. Powell will follow with a press conference thirty minutes later. To tame inflation, the central bank has raised rates by 525 basis points since March 2022, with the early phase of the so-called tightening cycle injecting volatility into the liquidity-addicted crypto and traditional markets.

On Wednesday, the central bank is expected to hold the benchmark borrowing cost steady between 5.25% to 5.5% and retain its long-favored data-dependent stance, offering no surprises to the market, according to Greg Magadini, director of derivatives at Amberdata. Rates traders see a near 100% chance of the Fed keeping rates steady on Wednesday.

"The Fed has been very adamant about remaining 'data dependent' and signaling the ability to 'hold rates higher for longer'. To me, this means the Fed can navigate this week’s FOMC meeting by keeping rates unchanged, but signaling rates will remain elevated while they monitor economic releases," Greg Magadini, director of derivatives at Amberdata, said in a note to clients on Monday.

"In my opinion, this would make the FOMC [Fed] meeting a low volatility event," Magadini added.

Time and again, the Fed has maintained that the future course of action with respect to interest rates depends on how inflation and employment evolve, refusing to signal an outright end of the rate hike cycle that began in March last year.

The Fed is expected to repeat the same message on Wednesday as inflation looks to rebound. Further, markets, addicted to rapid rate cuts over the past four decades, might quickly price in renewed liquidity easing if the Fed signals an end of the tightening cycle, complicating matters for the central bank.

In other words, the probability of the central bank offering a hawkish or dovish surprise is low, favoring the current low volatility regime in bitcoin and traditional markets.

"We doubt it [volatility] will come from this Fed itself," Singapore-based crypto trading firm QCP Capital said. "Into the final three meetings of the year, we expect the appetite within the FOMC to hike again is extremely low. At the same time, we do not see how Powell can assuredly call an end to this hiking cycle, given the surging pump prices and rebounding inflation."

"With [Fed Chairman Jerome] Powell likely to attempt his best volatility-killing fuzzy guidance yet again, it is unlikely that current market pricing of half a hike this year followed by three cuts next year will shift much," QCP added.

Bitcoin options expiring this Friday, which capture the Fed and Bank of Japan (BOJ) meetings, indicate these rate decisions could be non-events.

Options are derivative contracts that give the purchaser the right but not the obligation to buy or sell the underlying asset at a predetermined price at a later date. It is common for currency traders to look to options to gauge potential post-event volatility in the underlying asset.

"Based on Bitcoin options market pricing, traders expect that BTC will only move by 2.8% this Friday, a sign that nobody expects any market-moving comments from Chairman Powell," Markus Thielen, head of research and strategy at crypto services provider Matrixport, said.

"In 2023, Bitcoin has only rallied by +1% shortly after the FOMC meetings and increased by +3% one week later," Thielen added.