Polymarket users outperform economists in predicting US rate cuts

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Most economists’ forecasts for the Fed’s September 18 interest rate decision were wrong, with 105 of 114 predicting a cut of 25 basis points (bps). This is equivalent to 92% of forecasts. Interestingly, 54% of users on the Polymarket prediction market placed their bets on the correct outcome of 50 basis points.

Bets on the Fed’s decision yesterday collected nearly $59 million, with $10.9 million earmarked for the 50 basis point move.

However, despite having the majority of the odds, the largest amount of bets were placed on the “no change” result with $23.5 million in the poll. A 25bps increase saw the second highest bet amount, with $17.6 million in the pot awaiting that outcome.

The odds of a 50bp cut started to rise in the middle of last week, culminating in a 61% chance given by Fed funds futures yesterday as reported by Reuters.

In particular, optimism around a deeper rate cut has been met with increased risk appetite from investors. Matt Hougan, CIO of Bitwise, highlighted an increase in flows to Bitcoin (BTC) spot exchange-traded funds (ETFs), suggesting that BTC is becoming a “core instrument for risk-averse investors.”

Crypto goes up, stock goes up

The the first cut the US interest rate over the past four years has driven a positive reaction from risk assets.

Bitcoin (BTC) rose 4.8% in the last 24 hours, followed by strong performances from Ethereum (ETH), Binance Coin (BNB) and Solana (SOL) with peaks of 5.3%, 4.2 % and 8% respectively.

The positive reaction was seen by the crypto market as a whole, as the total value of the sector increased by 3.7%, surpassing $2.26 trillion.

However, the stock market failed to close on a positive note yesterday. Despite some upward moves following the rate cut decision, the S&P 500, Nasdaq and Dow Jones ended the trading day down 0.29%, 0.3% and 0.23% respectively.

In August, Polymarket saw a significant $1.44 million bet placed on a potential Federal Reserve rate cut by September, estimating a 58% and 40% chance of 50bps and 25bps cuts, respectively.

Earlier this month, 77% of Polymarket traders bet on a 25 basis point cut in the Federal Reserve’s upcoming decision, influenced by falling inflation and a weakening labor market.

In April, Polymarket traders changed their view, seeing a 32% chance that the Federal Reserve would not cut interest rates all year, up from just 7% in March.

Earlier this week, Polymarket traders predicted a 99% chance of a Federal Reserve rate cut at their September 18 meeting, with expectations leaning towards a 25 basis point cut.

Last week, one economist predicted that the Federal Reserve’s anticipated 25 basis point rate cut could trigger a “sell the news” event for risk assets, based on the probabilities specified for the upcoming FOMC meeting.

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