Fed Rate Cut May Boost Bitcoin and Crypto, but Watch for Short-Term Dips – Analysts
Why Trust Cryptonews
Key takeaways:
- The Federal Reserve is expected to cut rates by 25 to 50 basis points on Sept. 18.
- The rate cut could be a boon for crypto markets in the long term, analysts say.
- The swing in the odds for a 50 bps cut shows “maximum uncertainty” in Fed policy, one analyst says.
The U.S. Federal Reserve (Fed) is expected to announce its first interest rate cut in four years on Wednesday. A 25 basis points (bps) cut seemed the more likely outcome one month ago, but the odds swung in the last few days to give a 50 bps cut an outsized chance.
Trading data from futures contracts linked to the policy rate show a 60% chance that the Fed will cut its policy rate by half a percentage point. The odds for a 50 bps cut have risen from just 28% one week ago and 50% on Monday.
The move to lower rates could boost cryptocurrency markets in the long term, according to analysts. They say a decline in prices is also possible in the short term, depending on how big the cut is. The Federal Reserve interest rate is currently at 5.25% to 5.50%.
‘Maximum Uncertainty’ in Fed Policy
In an interview with Cryptonews, Shubh Varma, CEO and co-founder of New York-based Hyblock Capital, said the swing in traders’ bets for a 25 bps to 50 bps rate cut implies “maximum uncertainty” in Fed policy.
“A 50 basis point cut might trigger short-term bearish sentiment, as it could signal the Fed acting aggressively to stave off a recession,” Varma said. “On the other hand, a 25 basis points cut could be seen as more neutral and might be interpreted as bullish for risk assets like crypto.”
In August, Fed Chair Jerome Powell said the “time has come” to cut rates, stating that he does not wish to see any additional cooling in the labor market.
The Fed is under pressure to cut rates by a bigger margin after the latest unemployment report showed the U.S. economy added 142,000 jobs in August, lower than analysts forecasts of 163,000 jobs. The jobless rate slowed to 4.2% from 4.3% in July, in line with predictions, per data from the Bureau of Labor Statistics.
Varma said the uncertainty in Fed policy is compounded by technical factors in the crypto market. He noted that when the number of retail accounts expecting BTC prices to go up falls below 45%, “it can be a bearish indicator, as retail participation often increases at that point.”
According to the Hyblock Capital CEO, there are two key price levels (see chart below) where a lot of Bitcoin buying and selling is expected to occur as the Fed prepares to cut interest rates. There is liquidity for the $61,300 – $61,400 range, he said, but the $56,900 – $57,300 zone “is building liquidity faster and contains a larger amount.”
If the BTC price rises to the $61,300 – $61,400 area, Varma said, “sweep that liquidity, and we see retail long percentages fall below 45% – this could signal an opportunity for a short-term short trade.” The trading activity building below the range could offer “decent spots to take profits,” he added, “especially when considering the impact of a 50 bps cut.”
Crypto Won’t React ‘Aggressively’ to Fed Rate Cut
As of writing, the price of BTC is trading at around $59,000. For Mason Jappa, CEO and founder of U.S.-based Bitcoin miner Blockware, the medium to long-term outlook for cryptocurrency remains bullish, as lower interest rates tend to support risk-on assets like Bitcoin.
Speaking to Cryptonews, Jappa said the market has “almost entirely priced in” a 25 basis point cut, and “it’s unlikely that crypto reacts too aggressively in either direction in the short-term.”
“The caveat though is if Powell comes out with extremely dovish rhetoric, crypto will likely see a brief pump,” said the Blockware CEO.
He expects that, if sustained over some time, a reduction of such magnitude (25 basis points plus future cuts) would mean that people would have more money to spend. Jappa detailed:
“In the long term, the rate cuts are, of course, bullish. This will incentivize more credit creation, increasing net liquidity, as well as incentivize investors into risk-on assets as treasury yields come down.”
The last time that the Federal Reserve cut interest rates was in March 2020, during the pandemic. At the time, the Fed lowered the rate to a range of 0% to 0.25% to stimulate spending. The price of BTC soared more than 600% to under $30,000 that year.
A year later, in November 2021, Bitcoin reached its then-all-time high of $69,000, as the U.S. central bank held rates steady through 2022.
Warren Whitlock, a U.S.-based emerging tech advisor and crypto founder, was a bit more measured in his outlook on the Fed’s impending decision on interest rates.
“No one knows, but I think it’s reasonable to assume that the market is anticipating a rate drop, and so the announcement won’t make a difference,” Whitlock told Cryptonews.
He said the real issue behind all these maneuvers is that there is diminishing trust in fiat currency. Whitlock stated:
“Fiat can’t be trusted to hold value. This makes the case for crypto though the crypto market is not big enough to withstand other market forces just yet. We still go up and down on whatever other financial marketing does. In the longer term, crypto will have enough market power to even out the turmoil.”
More Cuts Ahead in 2024
The Federal Reserve is expected to deliver at least three rate cuts in 2024, according to a Reuters poll of 101 economists. The Bank will cut rates by 25 bps in September, November, and December, taking the federal funds rate to a range of 4.50% – 4.75% by year-end, they say.
Blockware’s Jappa concurred the Fed will “almost certainly” cut rates by 25 basis points at each meeting. But he is less optimistic about slashing rates by a half percentage point, as reflected in the odds from rate-futures contracts.
“Cuts by more than 25 basis points would only happen in the event of catastrophic unemployment data, which is unlikely to happen in the next couple of months,” Jappa told Cryptonews.
In making these multiple cuts, the Federal Reserve Bank will be aiming for the neutral rate, which is likely to be met at 2% to 3% federal funds rate, said the Blockware CEO, adding:
“Crypto will respond well in the short term, as will equities, unless larger cuts are necessary due to a slowing economy, at which point investors fears about a recession may spur a temporary drop in asset prices.”
Shubh Varma, the CEO of Hyblock Capital, expects that in 2024, the Fed will cut rates by an even bigger margin, 50-100 basis points.
“This would likely be a bullish catalyst and also priced in going into the cuts,” he told Cryptonews. “However, we can expect short-term volatility in both directions, especially around the times of these rate cuts.”
While the Sept. 18 decision “will set the tone,” Varma noted that the next cut in November will take place shortly after the U.S. presidential election, which may add “an additional layer of uncertainty.”
According to Varma, the election results could have a direct impact on market sentiment.
“Current sentiment suggests that a Trump victory might be perceived as bullish for crypto, while a win for Kamala Harris could be viewed as bearish,” he told Cryptonews. “Given that the race appears to lack a clear frontrunner at this time, there is uncertainty about how markets are pricing in the outcome.”
Will a Fed Rate Cut Favor Democrats in Elections?
When the plan to cut was initially announced last month, Republican presidential candidate Donald Trump criticized the Fed’s decision as a populist move that could sway the election in favor of the Democrats.
However, Fed Chair Powell insisted the decision was purely economic and was not influenced by politics. He said the cuts are merely a reversal of a 2022 rate hike to 5.25%, a reaction to inflation driven by post-pandemic activity and the war in Ukraine.
The argument is that conditions have improved, and now is the best time to reduce interest rates to stimulate economic growth.
The Bank of Canada has already trimmed its key rate three times since June, lowering it by a total of 75 bps to 4.25%. The European Central Bank recently cut its interest rate by 25 bps to 3.50%, following up on a similar cut in June, a sign that the liquidity crisis is global.
