In September, the US Federal Reserve will cut the benchmark interest rate for the first time in years. How will this affect Bitcoin?
On 18 September, the Federal Open Market Committee (FOMC), a structure within the US Federal Reserve (Fed), will meet, one of whose main tasks is to determine the country’s benchmark lending rate. The rate has been rising or staying the same for more than two years, a necessary measure to combat rising prices. However, in recent months, bankers have still managed to achieve an acceptable containment of the inflation rate, so now we are talking about the need to reduce the rate.
The base interest rate determines the affordability of financial loans. If the rate is high, you have to pay more on loans, if it is low, you have to pay less.
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A high rate is also more attractive for investments in traditional instruments such as treasury bills. And when the rate is lowered, investors are forced to look for other areas to buy.
US Fed Chairman Jerome Powell
This is precisely why it is believed that the US Fed’s plans for the long-awaited move to a lower rate will cause markets to rise. However, it will not happen immediately, because the economy usually reacts to such changes with a lag.
What will happen to cryptocurrencies because of the US Fed?
Before the upcoming FOMC meeting next Wednesday, there is already a consensus among analysts. This time the Fed will lower the rate for the first time in a long time, and most likely the scale of the reduction will be a minimum of 25 basis points.
Head of the US Fed Jerome Powell
However, if the reduction will be too rapid and will amount to 50 basis points, then this could have a negative impact on Bitcoin and crypto as a whole. The reason for such a feature was explained by 10x Research founder and analyst Marcus Thielen.
On Friday last week, the non-farm payroll employment report was released. The data was convincing enough to make a rate cut as early as 18 September a reality.
However, the supposed bullish cycle of liquidity easing could start off on the wrong foot for cryptocurrency investors. And especially if the Fed cuts the rate by 50 basis points.
Base interest rate changes in the US
According to CoinDesk’s sources, rate changes are expressed in basis points equal to 1/100th of a percentage point. Central banks, including the Fed, typically choose to change interest rates by 25 basis points.
However, sometimes the rate changes by much larger amounts, indicating an urgent need for change. For example, the Fed repeatedly raised rates by 50 and 75 basis points during the 2022 monetary tightening cycle, thus signalling the need to control inflation and triggering risk aversion in financial markets.
Previous base interest rate hikes by US Fed officials
A 50 basis point rate cut next week could signal heightened economic concerns or a sense of being behind schedule in combating the looming economic slowdown, according to Markus Thielen.
This, in turn, will force investors to reduce the share of capital in high-risk assets, which also include cryptocurrencies.
Cryptocurrency market growth
Here’s a quote from 10x Research founder Marcus Thielen on the subject.
While a 50 basis point Fed rate cut could signal deeper concerns to markets, the focus of bankers will be on mitigating economic risks rather than managing asset reactions.
As of today, the Chicago Mercantile Exchange (CME) FedWatch tool shows a 27 per cent probability that the Fed will cut rates by 50 basis points to a range of 4.75-5 per cent next week.
The probability of a 50 basis point rate cut is only 29 per cent, which is contrary to our view and the prevailing consensus. Voices are growing louder that the Fed is behind schedule, having missed signs of labour market weakness and being caught off guard in July.
In other words, a minimal cut in the benchmark interest rate may not be enough to gradually normalise the economy. However, the US Fed is able to take such a step in order not to provoke panic in the markets. However, the long-term prospects of such a decision remain questionable.
Probability of base interest rate cut by 50 and 25 basis points respectively on 18 September 2024
And here’s trader Craig Shapiro’s opinion on what’s going on, which he shared on Twitter.
The Fed doesn’t want to start with a 50 basis point rate cut because, frankly, the economy doesn’t need a panic at this stage. The markets, on the other hand, want them to start at 50 and go further and faster because the market is behaving like a cranky child in constant need of “more” liquidity.
Past data shows that the start of a rate cut cycle, regardless of the size of the first move, does not always quickly have a stimulative effect on asset prices. In other words, Bitcoin’s price reaction to this event may be delayed. But a spike in volatility closer to the FOMC meeting is a very real scenario.
As a result, the representatives of the US Fed found themselves in an uncomfortable position. On the one hand, a 25 basis points decline may not be enough, as the employment data hints at a relatively weak US economy. At the same time, a 50 basis point drop could create panic in the market due to recession fears. So for now, we can assume that bankers will probably prefer to make a series of minimal cuts in order to better control the situation. Well, in the long run, easing the pressure on the economy will benefit the coin sphere in any case - as well as other markets.
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