This week’s Federal Open Market Committee (FOMC) meeting has captured the world’s attention as its decision on the course of the United States monetary policy could send shockwaves across the financial markets.
Analysts expect that the central bank will announce its first rate cut since 2020 but this pivotal decision marks the beginning of what could be a challenging chapter for the country’s economy as expectations of a ‘soft landing’ are high but the economy may be more fragile than most imagine.
The market’s expectations are divided. Data compiled by the CME Group indicate that analysts see a 63% chance that the Fed will cut interest rates by 50 basis points while the remaining 37% of those surveyed see a much milder cut of 25 basis points taking place in this meeting.
Lower Rates Tend to Favor Bitcoin – Will That Be the Case Again?
Although Bitcoin (BTC) has mostly thrived in low interest rate environments, experts have cautioned that the economic landscape at the moment still presents some challenges for the digital asset to escalate to new heights.
Typically, lower rates incentivize higher risk-taking as investors opt to pour money into assets that generate higher yields as traditional alternatives become less attractive. Meanwhile, lower borrowing costs often lead to higher leverage levels that also fuel price increases across investment assets.
Alice Liu, lead researcher at CoinMarketCap, noted that while a 0.25% cut would likely provide a boost to the crypto markets, a more substantial 0.5% reduction “might signal recession concerns” and could result in a short-term pullback.
Arthur Hayes from BitMEX shares a similar view to Liu but he sees a much worse scenario. Hayes believes that crypto prices could crash just days after the Fed comes out with its rate cut decision as a 50 bps cut would signal that there are underlying economic weaknesses.
“The rate cut is a bad idea because inflation is still an issue in the U.S., with the government being the biggest contributor to the sticky price pressures. If you make borrowing cheaper, it adds to inflation,” Hayes told CoinDesk.
He added: “The second reason is that the interest rate differential between the US and Japan narrows with rate cuts. That could lead to sharp appreciation in the yen and trigger unwinding of the yen carry trades.”
Meanwhile, Mario Altenburger from Harbous Industrial Capital sees an entirely opposite scenario where a 50 bps cut could lead to a “short-term” rally for cryptos as it suggests that the Fed will be ready to take a more aggressive than expected approach to boost the economy.
Bitcoin Surges Above $60K Ahead of Fed Meeting
Another layer of complexity is added to the mix if one considers how close the US presidential election is. Experts have warned that the “Trump Trade” could influence crypto prices in the short term.
Analysts from Bernstein believe that a win for Trump could result in BTC prices skyrocketing past the $90,000 mark while his loss could result in a short-term crash that pushes the digital asset to the $30,000 level.
That said, not all analysts agree with this view as most believe that macroeconomic factors play a more crucial role in shaping the value of Bitcoin. In the lead-up to the Fed’s decision, Bitcoin has shown signs of bullish momentum as it temporarily moved above the $60,000 mark. This price action suggests that investors are positioning themselves for some favorable movements after the Fed’s cut.
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Thus far in 2024, BTC accumulates gains of nearly 42% while the price has jumped by almost 4% in the past 7 days.
Philipp Pieper, co-founder of Swarm Markets, suggested that while Bitcoin might experience a short-term retreat following the rate cut announcement, it should thrive in the long term as monetary policy easing has always favored the digital asset.
“The longer-term implications of easing monetary conditions lend themselves to a fresh bull cycle for bitcoin, ether and the rest of the market. In the past, bitcoin has correlated somewhat to major tech indices such as the Nasdaq, and broadly moves in line with monetary conditions, as investors hunt for yield in lower-rate environments,” Pieper argued.
The Fed’s Dilemma Lies on Fueling Growth Without Endangering Price Stability
A large number of factors will be considered by the Fed to cut rates either by 50 or 25 basis points. The first and most relevant one that the market is taking into consideration is inflation. In August, the consumer price index (CPI) rose by just 0.2% while the annualized figure stood at 2.5%.
This is very close to the Fed’s 2% target for inflation although they measure price variations in the economy by using a slightly different metric known as the Personal Consumption Expenditures (PCE).
In any case, it does seem that inflation is under control and that favors a more aggressive rate cut. Meanwhile, the country’s gross domestic product (GDP) expanded by 3% during the second quarter of the year – another factor that increases the odds of a 50 bps cut.
That said, there has been some weakness in the labor market as two of the latest employment reports – July and August – have missed the market compared to what economists expected.
Hence, even though there are merits to consider more aggressive policy easing decisions, a cautious Fed could opt to reduce rates slowly and gradually to rapidly correct course if things go sideways rather than taking chances with an economy that is still recovering from the impact of COVID and higher oil prices.
Despite short-term uncertainties, analysts maintain a bullish outlook for Bitcoin in the longer term. Thomas Perfumo, head of strategy at the crypto exchange Kraken, noted that conditions are “ripe for price action across all markets.”
Historical data shows that the final quarter of the year has traditionally been a bullish period for Bitcoin. From October to December, Bitcoin has experienced price increases of around 90% in the past decade.
As the cryptocurrency community awaits the Federal Reserve’s official announcement, it’s clear that the coming weeks will bring forth some interesting price action for Bitcoin and the digital asset market.
The underlying value proposition of Bitcoin as a decentralized and globally accessible asset remains unchanged regardless of these short-term price fluctuations.