The U.S. Federal Reserve is widely expected to cut its benchmark rate this week for the first time in four years, leaving investors speculating about the size of the cut and its potential impact on risk assets, including bitcoin.
Interest rate traders have adjusted their expectations, now betting the Fed will announce a 50 basis-point cut at Wednesday's Federal Open Market Committee (FOMC) meeting rather than a more conservative 25 basis-point reduction. According to the CME FedWatch tool, the likelihood of a 50 basis-point cut has climbed to 65%, eclipsing the 35% probability for a 25 basis-point cut. Several days ago, the market was giving two-thirds odds that rates would be cut by 25 bps and one-third that they would be lowered by 50 bps.
If the Fed decides to cut rates by 50 basis points, the market for risk assets, including bitcoin, could react positively, according to an analyst.
"Today‘s relatively strong Empire State Manufacturing report shows the market reaction is likely going to be positive if the Fed cuts by 50 basis points, since this particular leading indicator has signalled that underlying economic momentum has even accelerated in September implying some kind of early innings of a 'Goldilocks scenario,' with low inflation and stable growth as well as stimulative monetary policy," Bitwise Head of Research - Europe André Dragosch told The Block.
Some recent economic indicators have shown mixed signals. According to Monday's Empire State Manufacturing Survey, business activity in New York State grew for the first time in nearly a year, with shipments increasing significantly. However, employment within the state continued to decline.
"Firms grew more optimistic that conditions would improve in the months ahead, though capital spending plans were weak," New York Fed Economic Research Advisor Richard Deitz said.
This suggests that while some economic sectors are experiencing a recovery, the labor market and business investments are still under pressure—factors that the Fed may consider in its rate decision.
RELATED INDICES
Anticipation of upcoming rate cuts could boost bitcoin
Interest rate cuts tend to increase the valuation of risk assets, but according to Dragosch, it is more the anticipation of additional rate cuts — rather than the cuts themselves — that could give bitcoin a boost and potentially lead to sustained price appreciation in the coming months.
"I think the market will be driven more by rate cutting expectations than the cuts themselves over the coming months," the Bitwise head of research said.
According to the analyst, the need for additional rate cuts could be driven by recessionary indicators that are currently stalking the U.S. economy, such as slowing job growth. "Expectations of further rate cuts will likely intensify on account of the weakening U.S. economy and imminent recession, and our expectation is that this will be net positive for bitcoin and cryptoassets," said Dragosch.
Despite the current rate cut expectations, Dragosh argued that the Fed may still be behind the curve in its efforts to engineer a soft landing for the U.S. economy. Dragosch pointed to the Taylor Rule — a popular interest rate model — that suggests the Fed should have already reduced rates by at least 150 basis points.
"This is based on core PCE inflation and U.S. unemployment rate which we know will continue to deteriorate over the coming months based on more forward-looking indicators," Dragosch said.
Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. The Block continues to operate independently to deliver objective, impactful, and timely information about the crypto industry. Here are our current financial disclosures.
© 2024 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
