The Fed cut rates by 25 basis points on December 18, setting the upper limit at 4.50%, in line with expectations. Although a rate cut is usually bullish for cryptocurrencies, the market reacted tepidly.
In the past 24 hours, cryptocurrencies have fallen by 4%, reflecting market concerns over the Fed's upward adjustment of inflation expectations for 2025 and plans for only two rate cuts next year.
What does a rate cut mean for cryptocurrencies?
The Fed's updated forecasts present a complex outlook for digital assets. While lower interest rates suggest a more accommodative monetary policy, expectations of rising inflation and a slower pace of rate cuts dampen optimism.
Investors had hoped for a faster pace of rate cuts in 2025, which would benefit risk assets like cryptocurrencies.
"The stock market and cryptocurrencies have been booming for the past year, with high interest rates, and you're worried they will stop rising because the Fed will cut rates significantly as some have said," popular influencer 'Gum' wrote on X (formerly Twitter).
The U.S. Consumer Price Index (CPI) for November released last week showed a year-on-year increase of 2.7%, briefly boosting market sentiment. Bitcoin had earlier this week reached a new high of $108,000, thanks to inflation data meeting expectations.
However, this enthusiasm seems to have waned, with macro uncertainty becoming the focus.
"The Fed is cutting rates because the U.S. government cannot afford the interest payments on $36.2 trillion in debt. We have a $20 trillion budget deficit. We are paying $1.2 trillion in debt interest. They might want inflation to rise significantly. This would devalue the debt. But it would cause enormous economic losses for others," Wall Street Mav wrote.
Impact on Christmas and the first quarter of 2025
As the holiday season approaches, short-term impacts remain neutral to bearish, as the market digests the Fed's cautious stance. Short-term trading may experience greater volatility, especially during the low liquidity period around Christmas.
However, it is worth noting that the cryptocurrency market has been surging throughout the year, despite high inflation and interest rates. Ultimately, this is attributed to regulation and institutional adoption. The Bitcoin ETF has recently surpassed the total assets under management of gold ETFs.
Weekly net inflow of Bitcoin ETF.
Meanwhile, more cryptocurrency ETFs are expected to be approved next year. There is also the potential for Bitcoin reserves and favorable regulation for Trump. These will offset the impacts of rate cuts and smaller reductions.
Additionally, a weaker dollar may provide some support for Bitcoin and other cryptocurrencies as alternative assets. However, anticipated inflationary pressures may affect investor sentiment.
In the first quarter of 2025, the cryptocurrency market is likely to react to further economic indicators and central bank policies. The continued upward momentum of Bitcoin's price depends on whether the Fed adjusts its approach if inflation expectations rise further.
Prior to this, the market remained cautious, responding tepidly to what should have been a bullish rate cut.
[Disclaimer] Markets are risky, and investments should be made with caution. This article does not constitute investment advice, and users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Invest accordingly, and you bear the responsibility.