The Fed’s October interest rate decision could cause an unexpected shock to U.S. stocks and Bitcoin as unresolved federal government shutdown risks cloud the outlook.
Government shutdown delays key data before FOMC meeting
A partial federal government shutdown began on October 1, with many non-essential services closed, including the Bureau of Labor Statistics (BLS). The closure indefinitely postponed the release of the September jobs report, a key measure of the health of the labor market, scheduled for early this month.
The data freeze comes just weeks before the Oct. 28-29 Federal Open Market Committee (FOMC) meeting, when the Fed’s next interest rate decision will be announced.
Despite this turmoil, market optimism remains high.
Gold prices ended Friday at $3,886 per ounce, up more than 48% year-to-date, according to GoldPrice.org.
Gold’s rally in 2025 reflects large purchases by central banks and strong demand for ETFs from private investors, driven by inflation concerns amid President Trump’s trade war, record U.S. debt levels, and efforts by some countries, especially BRICS members, to reduce dependence on U.S. dollar assets since the start of the Russia-Ukraine conflict.
At the time of writing, Bitcoin is trading at around $123,196, according to CoinDesk Data, not far from its all-time high of $125,506 hit earlier in the day, driven by strong institutional interest and crypto ETF inflows.
Meanwhile, the Dow Jones Industrial Average and S&P 500 ended the week at record highs of $46,758.28 and $6,715.79, respectively, reflecting confidence in the Fed’s smooth policy transition.
Bitcoin, gold, and the S&P 500 are currently at or near all-time highs, likely due to expectations for further interest rate cuts this year and next, and investors wanting to avoid the persistent and increasing inflation that currently appears to exist around the world.
Market consensus is pricing in a 25 basis point rate cut from the Fed.
Futures and prediction markets are overwhelmingly pricing in a 25 basis point rate cut at the FOMC meeting.
As of Oct. 5, CME Group’s FedWatch tool shows a 96.2% chance of a 25 basis point rate cut and a 3.8% chance of a hold.
Decentralized forecasting platform Polymarket predicts a 3% chance of an increase of 50 bps or more, a 90% chance of a 25 bps increase, and an 8% chance of no change.
Why the Fed is less likely to pause rate cuts than traders expect
The ongoing federal government shutdown poses significant risks. With staff at the U.S. Bureau of Labor Statistics (BLS) furloughed, key labor statistics remain unreleased, denying the Fed’s latest wage and employment data, which is essential for assessing market tightness amid continued inflation.
The Fed faces the extremely difficult task of making interest rate decisions without significant economic inputs, an essentially blind decision.
This lack of timely data raises the very real possibility that some FOMC members will advocate pausing the current pace of rate cuts, rather than continuing to cut rates as expected.
With recent developments in the labor market unclear, there is a growing risk of premature easing that could destabilize inflation expectations. In the past, the Fed’s actions during times of lack of data have often been cautious to avoid policy mistakes.
At the same time, several factors are adding to this uncertainty.
A government shutdown itself could create downside risks through furloughs and possible permanent job losses for federal employees, which could hurt economic growth, but the extent of that remains unclear.
Meanwhile, many investors have set up their portfolios in anticipation of further rate cuts, meaning an unexpected rate cut could spook markets and create volatility that the FOMC would like to avoid.
In light of these concerns, the FOMC is likely considering continuing to cut interest rates modestly by 25 basis points to maintain market confidence and hedge against economic risks. Still, given these unprecedented challenges, the pause remains a reasonable outcome, underscoring that market expectations for rate cuts, while strong, are not guaranteed.
Private and regional data provides partial insight during shutdown
Between now and the FOMC meeting, several private sector and Federal Reserve regional statistical releases are expected to provide partial economic signals despite the shutdown.
If these indicators show slower inflation and slower growth, Fed Chairman Jerome Powell could move ahead with the widely expected 25 basis point rate cut. Stronger signals of sustained inflation and resilient growth could prompt the Fed to pause, contradicting market pricing and increasing volatility.
If the government shutdown ends by, say, mid-October, the delayed official September jobs report could be released ahead of the FOMC meeting, providing a clearer picture of the data and potentially confirming market expectations.
Why a 50 basis point rate cut is highly unlikely
Markets have all but ruled out the possibility of a 50 basis point rate cut, as inflation remains above the Fed’s 2% target, especially in the service sector where wage pressures continue.
A half-point rate cut risks signaling premature easing, which could destabilize the labor market and inflation expectations.
Chairman Powell’s public statements have emphasized caution and data dependence, making a more modest 25 basis point rate cut the prudent course.
How investors can protect themselves from a Fed pause scenario
Given the possibility of a policy pause that is not fully priced in by the market, investors, especially crypto investors, should consider hedging their risks.
- Put options on Bitcoin and major stock indexes offer a relatively inexpensive way to protect against sudden downside price swings.
- Reduce high leverage and position sizing on volatile assets to reduce drawdowns.
- Increasing your exposure to safe-haven assets like gold and government bonds can help stabilize your portfolio during market stress.
- Use a volatility ETF or fund to profit from sudden spikes in volatility.
Institutional investors routinely employ such strategies. Retail investors have a growing number of low-cost tools to protect against tail risk as well.
Bottom line: Markets face an uncertain path to the next FOMC meeting
The October 28-29 FOMC meeting is shaping up to be a crucial test for the market.
The ongoing government shutdown has obscured vital labor data, creating a dangerous blind spot in the expectations of investors and policymakers.
Markets are overwhelmingly pricing in a 25 basis point rate cut, but a pause or delay by the Fed due to data uncertainty could trigger a sharp correction in stocks and cryptocurrencies. Investors should monitor private economic indicators and regional inflation data for October and consider pragmatic hedges to protect against unexpected volatility.
A balanced risk posture is essential to navigating this uncertain macroeconomic environment.
