Capital Flows Pivoting as Fed Rate Cut Debate Heats Up

The U.S. Federal Reserve is expected to make a key policy decision in early September, with a growing number of market participants anticipating a 50 basis points (bps) rate cut. This expectation has been further amplified by recent economic data and evolving market sentiment. According to CME Group’s FedWatch Tool, as of September 9, there is an 88.4% probability of a 25 bps reduction and an 11.6% chance of a 50 bps cut. This marks a slight shift from earlier in September, when the 50 bps cut was estimated at just 11%.

Standard Chartered has become one of the most vocal institutions in this debate, raising its earlier forecast of a 25 bps cut to a 50 bps reduction. The bank attributed this revision to the U.S. August jobs report, which showed weaker-than-expected employment growth and a rise in the unemployment rate to a near-four-year high of 4.3%. Standard Chartered highlighted that this data has shifted the labor market narrative from "solid" to "soft" in under six weeks, supporting the case for a larger-than-anticipated rate cut.

The potential for a 50 bps reduction has also gained traction in the cryptocurrency and DeFi markets. On Polymarket, the trading platform has seen 80% of the market expecting a 25 bps cut, with a 17.5% probability for a 50 bps or larger cut. This aligns with the broader market trend of increasing confidence in Fed easing, particularly as the central bank faces mounting political and economic pressure. Notably, Arthur Hayes, co-founder of BitMEX, has taken a bold stance, betting that a 50 bps cut is likely, and that such a move could drive significant capital flows into DeFi and synthetic stablecoins like sUSDe, which currently offer yields as high as 7%.

Hayes further suggested that if traditional financial markets begin chasing higher-yielding assets, a substantial portion of that capital could shift into DeFi. He cited the rising potential of stablecoins like USDE and the performance of the ENA token, which he forecasts could surpass $1.50 as demand for yield-driven assets intensifies. This perspective is not without precedent—similar shifts were observed in 2024 when the Fed made a 50 bps rate cut during a comparable period, leading to a reevaluation of market expectations for subsequent easing.

While most major banks still favor a 25 bps cut for September, some, including Bank of America and Macquarie, have revised their forecasts upward, now anticipating 25 bps reductions in both September and December. Morgan Stanley and Deutsche Bank, however, have not yet endorsed a 50 bps cut but have noted the possibility of back-to-back reductions. The market’s current pricing of a 90% chance of a 25 bps cut and 10% for a larger cut reflects a consensus leaning toward moderate easing, though the debate remains active.

As the Fed’s September 17 meeting approaches, financial markets are preparing for the potential impact of the rate decision. In recent weeks, the crypto market has already begun to show signs of optimism, with the total market cap rising to $3.88 trillion and Bitcoin and Ethereum posting gains. Analysts suggest that a Fed rate cut—regardless of the magnitude—will likely ease financial conditions and make risk assets more attractive. The ultimate policy decision will be closely watched for its potential to influence capital flows across traditional and digital asset markets.