Will Cryptocurrencies Benefit from a 50 Basis Point Drop by the Federal Reserve?

2024-09-20, 10:41

[//]:content-type-MARKDOWN-DONOT-DELETE
![](https://gimg2.gateimg.com/image/article/17268287551692587449analysis.jpeg)
## [TL；DR]: 
Early this morning, the Federal Reserve announced a 50bp interest rate cut, slightly exceeding expectations. The <a href="/id/price" target="_blank" class="blog_inner_link">crypto market</a> rose accordingly, showing relatively outstanding performance.

Looking back at history, almost every cycle of interest rate cuts has been accompanied by a recession in the US economy. The market is still undecided about the game between speculative liquidity easing and economic recession.

Multiple institutions are generally optimistic about further interest rate cuts this year, which also means that the arrival of a loose liquidity environment will benefit the crypto market, and a new cycle in the crypto market may already be on its way.

## Introduction
The long-awaited interest rate cut in the market has finally landed. The Federal Reserve announced a 50 basis point reduction in the target range of the benchmark interest rate, causing the US stock market and crypto market to rise in response but then fall again. What are the practical considerations for the arrival of the Federal Reserve's interest rate cut cycle, and what impact will it have on the crypto market? This article provides an in-depth interpretation of this.
 
## First Interest Rate Cut in 4 Years, With a Notable 50 Basis Point Decrease
On September 18 local time in the United States, the Federal Reserve announced an important monetary policy adjustment, lowering the target range of the federal funds rate by 50 basis points to 4.75% to 5%. This is the first interest rate cut since March 2020, marking the end of the Fed's two-year interest rate hike cycle.

The decision of the Federal Reserve to cut interest rates this time was made based on a comprehensive consideration of multiple economic factors. Firstly, the driving force of economic growth in the United States has weakened, and the employment growth rate has significantly slowed down. Although the unemployment rate is still low, it has increased. Meanwhile, although the inflation rate is still higher than the 2% target set by the Federal Reserve, it has shown a gradual downward trend, especially after removing volatile factors such as food and energy; the core inflation rate has dropped to a lower level.
 ![](https://gimg2.gateimg.com/image/article/17268287851.jpg)
Source: Public Information
 
Powell released a more prominent hawkish signal at the press conference, repeatedly emphasizing that the committee is "not in a hurry" and will gradually "recalibrate" the Federal Reserve's monetary policy stance. He is more confident in his goal of continuously lowering inflation to 2%, which provides support for him to take interest rate cuts.

It is worth noting that the decision of the Federal Reserve to cut interest rates this time is not without controversy. The meeting saw the first opposition vote since September 2005, with one official leaning towards a 25 basis point rate cut. This indicates that there are still differences within the Federal Reserve regarding the current economic situation and future policy direction. Nevertheless, the Federal Reserve emphasizes its firm commitment to supporting full employment and the goal of restoring inflation to 2%, which has gained greater confidence, and will gradually adjust its monetary policy stance based on economic data.

In addition, the main change in economic forecasts is reflected in the upward adjustment of unemployment rate forecasts, with the unemployment rate expected to remain at 4.4% in 2024 and 2025, and 4.3% in 2026. The inflation forecast has been slightly lowered, with the core PCE expected to be 2.6% in 2024, 2.2% in 2025, and 2.0% unchanged in 2026. Most of the interest rate charts predict that there is still 50 basis points of room for interest rate cuts this year.
 ![](https://gimg2.gateimg.com/image/article/17268288072.jpg)
Source: Public Information
 
It is worth mentioning that many analysis institutions originally believed that the first round of interest rate cuts of 25 basis points was a routine start, which could provide more flexibility for subsequent interest rate cuts. However, US interest rate futures showed that the first 50 basis point cut was successful and the bet was successful. According to experts from multiple institutions and the trend of US interest rate futures, a cumulative interest rate cut of 76 basis points will be achieved by the end of 2024, and a cumulative interest rate cut of 196 basis points will be achieved by October 2025.
 
## The Market First Rises and Then Falls, and Generally Optimistic about the Benefits of Interest Rate Cuts
Under the impact of the Federal Reserve's announcement of a 50 basis point interest rate cut, the crypto market has shown a completely different reaction path from traditional financial markets. The crypto market quickly responded positively, with <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> breaking through the $62,000 mark and <a href="/id/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a> and other Altcoins generally recording significant gains, presenting a prosperous scene in the entire market. This rebound is not only ahead of the US stock market and spot gold, but also accompanied by a large number of short positions, indicating a highly optimistic market sentiment.
![](https://gimg2.gateimg.com/image/article/17268288303.jpg)
Source: Gate.io
 
On the other hand, although the US stock market and gold briefly rose in traditional markets, they then fell back, indicating the market's cautious attitude towards the future economic outlook. The S&P, Dow Jones, and Nasdaq indices all ended in decline, while spot gold also fell from high levels, indicating the market's complex expectations for the effectiveness of interest rate cuts and subsequent policies.

Among mainstream financial market participants, there are those who are optimistic about loose policies, believing that they will boost market liquidity, as well as those who are concerned that they may exacerbate inflation and market chaos. As far as I can see, many analysts have pointed out that bank stocks will generally rise due to the reduction in loan costs caused by interest rate cuts, while the bond market reflects uncertainty about future economic policies, with two-year US Treasury yields briefly falling.

According to past historical experience, this 50bp unconventional interest rate cut can only occur in economic or market emergencies, such as the technology foam in January 2001, the financial crisis in September 2007, and the epidemic in March 2020, which suggests that risk assets may fall sharply.
 ![](https://gimg2.gateimg.com/image/article/17268288504.jpg)
Source: Bloomberg，CICC Global Institute
 
In addition, experts within the crypto market have also expressed their respective views. Lark Davis and other KOLs predict that 2025 will be a market peak and call on investors to exit in a timely manner; However, research institutions such as Glassnode have pointed out that the Bitcoin market is currently in a stagnant period, with both supply and demand sides showing signs of inactivity. Hyblock Capital analyzes from a technical perspective and believes that the deep depletion of the Bitcoin market may indicate a bullish price trend.

It is worth noting that the attitudes of the US political and financial circles towards the interest rate cut policy are also different. From Trump's criticism to Harris' affirmation, to Congressman Warren's questioning of Powell's actions, all of these reflect the complex political and economic impacts of interest rate cuts.

Although the market has not yet reached a solid consensus, it is widely expected that there will be more interest rate cuts this year, which will have a positive impact on crypto assets in the long run.
 
## Looking Ahead to the Alternative Performance of Crypto Assets During the Interest Rate Cut Cycle
In fact, looking back at past interest rate cut cycles, we can obtain some forward-looking clues. Since the 1990s, the cycle of interest rate reduction has often led to the initial rise of "denominator assets" (such as treasury bonds, gold, etc.), while the performance of "molecular assets" (such as copper, the U.S. stock market, etc.) has been flat. But as interest rate cuts deepen, the latter often counterattacks.

A significant 50 basis point interest rate cut has raised concerns in the market about economic growth. Future economic data will become the focus. If the economy shows stability, especially in interest rate-sensitive areas such as real estate, it will strengthen the optimistic signal of "moderate interest rate cuts and stable economy," and the market will focus on the prospect of recovery.
 ![](https://gimg2.gateimg.com/image/article/17268288735.jpg)
Source: Bloomberg，CICC Global Institute
 
However, as pointed out in the CICC Research Report, directly applying historical laws and ignoring cycle specificity can easily lead to misjudgment. The timing of asset conversion is closely related to the degree of economic slowdown. For example, after the interest rate cut in 2019, the trend of treasury bond and gold reversed, while copper and US stocks rebounded, indicating asset rotation.

So simply applying historical experience to believe that crypto assets will either converge or diverge from the trends of the US stock market or gold seems too simplistic.

In fact, although historically, liquidity easing cycles have been beneficial for crypto assets such as BTC, in the short term, various other factors will still dominate price fluctuations. For example, the Federal Reserve began cutting interest rates in the third quarter of 2019. Although the initial rate cuts were favorable for Bitcoin, the price subsequently rebounded and stabilized at around $7,000 by the end of the year; In the early stages of the March 2020 interest rate cut, the price of Bitcoin plummeted to $3,800, but this was due to the panic and liquidity crisis in the global market, not simply the impact of two emergency interest rate cuts.
![](https://gimg2.gateimg.com/image/article/17268288906.jpg)
Source: tradingeconomics

In addition, as mentioned earlier, the recession cycles triggered by a 50 basis point interest rate cut in history have all started against the backdrop of widespread concerns about macroeconomic weakness, which may lead to long-term sluggishness in risk assets such as Bitcoin.

Overall, the crypto market may receive more attention and investment in the context of increased liquidity, rising risk appetite, and changes in the macroeconomic environment, especially with the current 50 basis point interest rate cut driving sentiment. However, there are still significant differences in people's expectations of a recession in the US economic outlook, coupled with the liquidity of spot ETFs and their increasing linkage with the US stock market, Bitcoin may face a more complex and volatile situation. Investors still need to be cautious when making decisions and consider multiple factors comprehensively.

<div class="blog-details-info">
<div>Author:**Carl Y.**, Gate.io Researcher
<div>Translator:Joy Z.
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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