Polymarket users outperform economists in predicting US rate cuts

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

The bets on the Fed decision yesterday amassed nearly $59 million, with $10.9 million allocated to the 50 bps decrease. 

Yet, despite having the majority of the odds, the largest amount of bets was placed at the “no change” outcome, with $23.5 million in the poll. A 25 bps increase registered the second-largest bet amount, with $17.6 million in the pot expecting this outcome.

The chances of a 50 bps rate cut started rising in the middle of last week, culminating in a 61% chance shown by Fed funds futures yesterday, as reported by Reuters.

Notably, the optimism around a deeper rate cut was met with an increased appetite for risk from investors. Matt Hougan, CIO of Bitwise, highlighted an increase in inflows toward spot Bitcoin (BTC) exchange-traded funds (ETFs), which suggests that BTC is becoming a “go-to tool for investors looking to go risk-on.”

Crypto rises, equities tank

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

Bitcoin (BTC) is up by 4.8% in the past 24 hours, followed by good performances from Ethereum (ETH), Binance Coin (BNB), and Solana (SOL), with spikes of 5.3%, 4.2%, and 8% respectively.

The positive reaction was registered by the crypto market as a whole since the sector’s total value grew by 3.7%, surpassing $2.26 trillion.

However, the equities market didn’t manage to close in a positive tone yesterday. Despite some upward movement registered following the rate cut decision, the S&P 500, Nasdaq, and Dow Jones ended the trading day with drawdowns of 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 for 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 declining inflation and a weakening job market.

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

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

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