It turns out that when the Fed cuts interest rates, the cost of borrowing goes down, making it easier to access credit and increasing liquidity in the markets. With more money available and less attractive savings rates, investors often look to higher-risk, higher-yield assets, such as cryptocurrencies, in search of higher returns.
Bitcoin rises more than 4% this Tuesday and exceeds $60,0000. This puts it close to its August high, all in the run-up to the Federal Reserve meeting at which it is expected to announce its first interest rate cut in four years. A month ago, a 25 basis point (bp) cut seemed more likely, but in recent days the odds of a 50 bp cut have increased significantly.
Trading data for futures contracts linked to the policy rate show a 60% probability that the Fed will cut its rate by half a percentage point. A week ago, The odds of a 50 bp cut were only 28% and on Monday they rose to 50%According to analysts, the move to lower rates could boost cryptocurrency markets in the long term, although a short-term price drop could also occur depending on the size of the cut. Currently, the Fed’s interest rate ranges between 5.25% and 5.50%.
‘Maximum uncertainty’ in Fed policy
In an interview with the US press, Shubh Varma, CEO and co-founder of New York-based Hyblock Capital, said the shift in traders’ bets from a 25bp cut to a 50bp cut reflects “maximum uncertainty” in Fed policy.
“A 50 basis point cut could trigger short-term bearish sentiment as it could signal that the Fed is acting aggressively to avoid a recession,” Varma said. “On the other hand, a 25 bp cut could be seen as more neutral and could be interpreted as positive for risk assets like cryptocurrencies.” In August, Fed Chair Jerome Powell declared that “the time has come” to cut rates, noting that he does not want the labor market to cool further.
The Fed is under pressure to cut rates further following the latest unemployment report, which showed the U.S. economy added 142,000 jobs in August, below the 163,000 expected by analysts. The unemployment rate slowed to 4.2% from 4.3% in July, in line with forecasts, according to data from the Bureau of Labor Statistics.
Varma explained that the uncertainty in Fed policy is compounded by technical factors in the cryptocurrency market. He noted that when the number of retail accounts expecting BTC prices to rise falls below 45%, “this can be a bearish indicator as retail participation typically increases at that point.”
Bitcoin and the Fed
There is some precedent that could shed light on what lies ahead for the crypto market. The last time the Federal Reserve cut interest rates was in March 2020, during the pandemic. At that time, the Fed lowered the rate to a range of 0% to 0.25% to stimulate spending. That year, the price of BTC soared by more than 600%, falling below $30,000.
A year later, in November 2021, Bitcoin hit its then all-time high of $69,000, as the US central bank kept rates steady throughout 2022. This surge was attributed to the injection of capital into the economy and the increased interest of institutional investors in Bitcoinwhich created a favorable environment for its growth.
Now, the relationship between monetary policy and Bitcoin price has become more evident, as the cryptocurrency shows sensitive behavior to changes in interest rates and market liquidity, the expert says.
It turns out that lower interest rates could devalue fiat currencies, which would reinforce the narrative of Bitcoin as a store of value or hedge against inflation.
Source: Ambito
I am an author and journalist who has worked in the entertainment industry for over a decade. I currently work as a news editor at a major news website, and my focus is on covering the latest trends in entertainment. I also write occasional pieces for other outlets, and have authored two books about the entertainment industry.
