Welcome to the Forward Guidance newsletter, brought to you by Casey Wagner, Ben Strack and Felix Jauvin. Here’s what you’ll find in today’s edition:

• Felix makes sense of the market reaction to yesterday’s Fed meeting. 

• With BTC notching a bunch of new highs recently, when will it be ETH’s turn?

• Congress is scrambling to make a deal, but not all lawmakers are on board. 

WTF happened yesterday?

So the Fed cut rates by 25bps yesterday and markets threw a fit. Hell, we even ran a headline talking about a Santa rally that was about to ensue. Whoops. It happens. 

But what gives? What actually happened? Let’s break it down.

Going into an FOMC meeting, a constellation of factors come together to create the tension that leads to the price outcome of the event. This combination of the market’s expectations is based on the FOMC’s forward guidance (the name of this newsletter!) and the positioning of market players going into the event with respect to those expectations. Let’s break the two down. 

Expectations

Going into the meeting, the SOFR curve, which can be considered the market implied forecast of the fed funds rate path toward its terminal rate, had departed significantly from the Fed’s previous summary of economic projections forecast from September.

This largely reflected a major phase shift upward in economic strength and resilience of the labor market, requiring less rate cuts than what everyone expected in September. 

In 2025, the market was only anticipating three-ish rate cuts. Therefore, to surprise the market to the hawkish side of things, the hurdle was very high to achieve this. 

To my surprise, the FOMC managed to do it while also cutting rates yesterday. A hawkish cut? What a time to be alive. 

By moving up the expected fed funds rate to 3.9% (from 3.4%), the FOMC forecasted only two cuts in 2025 vs. the already hawkishly positioned market that expected three.

This decrease in the amount of cuts was largely driven by increased uncertainty on the path of inflation in the next 12 months, as seen here:

All of that information got distilled into this simple move — the second dot here moving above the market’s expectation in 2025:

Now what made this move so brutal yesterday? The second part: positioning. 

Positioning

There’s a trifecta of positioning dynamics that came together to lead to the perfect kindling, sparking the fire that was yesterday. As Tyler Neville (co-host of the roundup) discusses here, with the VIX being so low into the event, the systematic crowd was aggressively long:

Further, there were widespread expectations of seasonality dynamics in markets (i.e. the Santa rally we alluded to yesterday) to take us to the promised land. This led to everyone piling in on the same trade of longing high beta risk assets under an assumption of continued dovishness from Powell.

Finally, we have the largest options expiry in history happening this week. With such large open interest, dealers who have to hedge their delta exposure end up chasing gamma in a reflexive manner that amplifies moves in markets. This further led to yesterday’s acceleration.

As always, there’s no single cause for market moves on any day. More so, it’s the constellation of a variety of factors that come together to cause the outcome. And some days those end up being quite aggressive moves, like we saw yesterday.

— Felix Jauvin

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The total amount the Bank of England has eased interest rates in 2024. 

The UK central bank on Thursday opted to hold interest rates at 4.75% after delivering two quarter-percentage-point cuts earlier in the year. The decision comes as inflation rose to an eight-month high in November.

Bitcoin keeps hitting new highs. Good for bitcoin, ether says (if the asset could talk). 

ETH’s price of $3,470 (as of 1:30 pm ET Thursday) is about 30% off of its nearly $4,900 all-time high (set in November 2021).

LMAX Group market strategist Joel Kruger said a weekly close above $4,000 could help accelerate the rally toward a retest of its price peak. That “could easily play out between now and year end,” he told me earlier this week.

Stocks, BTC and ETH then dipped following Wednesday’s FOMC meeting. Still, Kruger said he doesn’t expect the latest crypto asset selling to materially impact longer-term price outlooks.

CoinShares research associate Luke Nolan told me he’s eyeing February or March for ETH to hit a new high — that is, if market momentum continues and ether ETF flows remain strong.

He sees several factors working in ETH’s favor: a multi-year low in the ETH/BTC ratio; a flip in retail and institutional sentiment; and being an attractive relative value trade (given ETH is one of the few notable coins yet to hit an ATH this cycle).

On the investor sentiment piece, US spot ETH products have brought in $3 billion of net inflows since Nov. 6 (after the election). That number is $13.5 billion for spot BTC funds over that span.

BTC remains an “easier sell” for many investors given its digital gold narrative, Nolan argued. More difficult to grasp is an analogy of Ethereum as a kind of global decentralized AWS.

“It's a slower process to get people to understand [ETH’s] value proposition,” he added. “But it seems to be happening more so now than it was when the products initially launched.”

— Ben Strack

It seems I left Washington just as things got interesting.

Bipartisan talks to avert a government shutdown tomorrow are in shambles after President-elect Donald Trump rejected the continuing resolution, advising top Republicans to renegotiate key aspects of the plan. 

The 1,500-page bill, introduced Wednesday, would fund the government for the next three months — allowing operations to continue through the holidays and punting the deadline to pass a comprehensive budget to the early days of Trump’s second term. 

Trump and Vice President-elect JD Vance are advocating for a controversial provision that goes against long-standing GOP policy: raising the debt ceiling. 

“Increasing the debt ceiling is not great, but we’d rather do it on Biden’s watch,” they wrote in a statement yesterday. “If Democrats won’t cooperate on the debt ceiling now, what makes anyone think they would do it in June during our administration? Let’s have this debate now.”

While top Republicans convene in the House speaker’s office (in a meeting I’m told was “not pretty”), some of Trump’s more outspoken allies are throwing in the towel. 

“I’m all in,” Rep. Marjorie Taylor Greene of Georgia wrote on X. “The government can shut down all the way until Jan. 20 as far as I’m concerned.”

“Shut it down,” Tennessee Rep. Tim Burchett added. 

The clock is ticking, and it looks like they just might.

— Casey Wagner

• Fed Chair Jerome Powell said yesterday: “We’re not allowed to own bitcoin” — adding the Fed is “not looking for a law change.” These remarks come after US Sen. Cynthia Lummis floated a bill to create a strategic bitcoin reserve and Donald Trump last week signaled such a reserve is being considered. 

• Bitcoin’s price hovered around $98,000 at 1:30 pm ET — down 2% from a day ago.  

• Hut 8 has bought 990 BTC for roughly $100 million. The company’s total holdings of 10,096 BTC rose to a value above $1 billion before the asset’s latest dip. Meanwhile, the CFO of CleanSpark said the company will invest in its ability to mine BTC at a cost beneath $40,000 instead of buying above $100,000.