The Federal Reserve is expected to announce its long-awaited rate cut. But why is the crypto world so concerned about the outcome?
Wednesday will be an important day for the markets.
The U.S. central bank is expected to eventually cut interest rates from a 23-year high after raising them in 2022, with the outcome likely to have broad implications for all major markets.
Under Chairman Jerome Powell, the Fed has raised borrowing costs to control inflation that has surged in the wake of the coronavirus pandemic.
Now, with the job market strengthening, the Fed plans to cut interest rates — hoping not to trigger a recession in the process.
The market expects interest rates to fall on Wednesday following the Federal Open Market Committee (FOMC) meeting which begins today and ends on Wednesday.
It appears that digital assets are more sensitive to Federal Reserve policy than ever before — which is why the crypto world was so focused on what happened on Wednesday.
Jake Ostrovskis, an over-the-counter trader at cryptocurrency trading firm Wintermute, said a rate cut would mark a “turning point” in monetary policy, which could boost cryptocurrencies.
Historically, such moves increase liquidity in the financial system, which tends to benefit risk assets like Bitcoin.”
In other words, the more investors who are willing to take on risk, the more money they will be willing to invest, which could cause the price of a digital asset to rise.
What ordinary people like us are most concerned about is how big the interest rate cut will be.
Markets have already priced in a rate cut, but the difference between a 25 basis point and a 50 basis point cut could have a huge impact.
Correlations between cryptocurrencies and broader risk assets are at their highest level in 18 months, prompting crypto investors to pay closer attention to these economic trends.”
An unexpected 50 basis point rate cut could provide an “unexpected boost” to risk assets.
On Monday, Sen. Elizabeth Warren, one of the biggest cryptocurrency critics in Congress, joined two senators in sending a letter to the Fed chairman calling for a 75 basis point rate cut. She reasoned that any rate cut below that level could trigger a recession.
Yang Youwei, chief economist at mining company BIT Mining Limited, said the "magnitude of the rate cut" could significantly affect "market liquidity, investor sentiment and the relative attractiveness of these assets."
But Ostrovskis said the short-term size of the rate cuts was less important than the “longer-term outlook for interest rates,” including how long the rate-cutting cycle is expected to last and the committee’s views on the labor market.
So all eyes are on Powell.