On Wednesday afternoon, the Federal Reserve announced a 25 basis point cut in the benchmark interest rate but also indicated that the number of rate cuts in 2025 may be fewer than previously expected, leading to a significant drop in both the US stock and cryptocurrency markets.
According to the Federal Reserve's latest quarterly economic forecast, there may only be two rate cuts in 2025, fewer than the four predicted in September and lower than the three that the market expected before the meeting. This means that the Federal Reserve will be more cautious in weighing the relationship between inflation and economic growth. Furthermore, Federal Reserve members have also revised their forecasts for next year's personal consumption expenditures (PCE) and core PCE inflation, increasing them from 2.1% and 2.2% to 2.5%.
Powell referred to this change as a "new phase" of monetary policy and emphasized that after a 100 basis point cut in 2024, interest rates are now much closer to neutral levels.
At the close of the day, all three major stock indices fell, with the Dow Jones initially down 2.59%, setting a record for the longest single-day consecutive drop in 50 years (falling for the 10th consecutive trading day). The S&P 500 index dropped 2.95%, and the Nasdaq fell 3.56%. Meanwhile, the dollar surged to a two-year high, and the Chicago Board Options Exchange's volatility index (VIX) skyrocketed by 58%, reaching 25, indicating increased uncertainty among investors regarding future interest rate changes, with market sentiment becoming more anxious.
Is Powell's statement a slap in the face to Trump?
At a news conference on Wednesday, when asked about Trump's idea of establishing a strategic Bitcoin reserve, Powell responded, "We (the Federal Reserve) are not allowed to hold Bitcoin, the Federal Reserve Act specifies the assets we can hold, and we do not intend to change that law. This is something that Congress needs to consider, and we do not want the Federal Reserve to change the law."
After the Federal Reserve's announcement, Bitcoin's price briefly fell to $104,000 and further dropped to around $100,256 following Powell's remarks, with a nearly 5% decline within 24 hours. Meanwhile, altcoins suffered even greater losses, with XRP, ADA, and LTC prices all dropping nearly 10%.
Trump has repeatedly stated his intention to establish a strategic Bitcoin reserve, mentioning in a CNBC interview last week, "We are going to achieve great things in the cryptocurrency space because we do not want other countries to dominate the cryptocurrency field; we want to be the leaders."
According to reports from Bitcoin Push, Republican Senator Cynthia Lummis from Wyoming is drafting a bill that plans to require the US Treasury to purchase 1 million Bitcoins within five years, with funding sourced from the Federal Reserve's bank deposits and gold reserves.
Other states in the US have also proposed similar legislation. A Republican lawmaker from Pennsylvania introduced a bill in November allowing the Pennsylvania Treasury to invest in Bitcoin, digital assets, and cryptocurrency-based exchange-traded products.
However, the idea of establishing a strategic Bitcoin reserve has also faced some criticism. Former New York Federal Reserve Bank President Bill Dudley stated in a Bloomberg opinion piece last week that this would be a "bad deal" for Americans.
An analysis report released by Barclays Bank this week pointed out that funding a strategic Bitcoin reserve may require Congressional approval and the issuance of new government bonds. The report also mentioned that, considering the funding sources for such a reserve, Barclays analysts are skeptical about whether this plan can proceed smoothly, believing that the Federal Reserve may strongly oppose it.
What will the subsequent trend be?
Currently, the crypto market seems overly optimistic about the prospect of the US potentially establishing a strategic Bitcoin reserve, ignoring the movements of other countries. Research from Grayscale indicates that sovereign wealth funds in Asia and the Middle East are more likely to become the next driving force behind Bitcoin adoption.
Grayscale Research Director Zach Pandl stated, "After Powell's speech, Bitcoin's price fell significantly, indicating that investors may be too focused on the theoretical possibility of Bitcoin as a strategic reserve. We expect more nation-states to adopt Bitcoin, but it is more likely that sovereign wealth funds in Asia and the Middle East will lead, as these funds already manage a very diversified pool of assets."
Andre Dragosch, Head of European Research at Bitwise, believes, "I think the biggest problem the Federal Reserve faces is that despite rate cuts, the financial environment is still tightening. Since September, long-term bond yields and mortgage rates have been rising, and the dollar has appreciated, indicating a tightening financial environment. The continued appreciation of the dollar poses macro risks to Bitcoin because dollar appreciation is usually accompanied by a contraction in the global money supply, which is unfavorable for Bitcoin and other crypto assets. In fact, the Federal Reserve's net liquidity is continuously decreasing. In my view, tightening liquidity and a strong dollar are the biggest risks Bitcoin faces... However, on the other hand, on-chain factors for Bitcoin remain very strong, especially the continued decline in exchange balances, which supports the expectation of a growing supply gap for Bitcoin."
The decline in Bitcoin has led to a dramatic change in market positions on both the long and short sides. According to charts provided by crypto analyst Skew, long positions were stopped out and short positions realized profits, causing Bitcoin's price to fall to the $100,000 to $98,000 range in search of support.
Skew emphasizes that if Bitcoin wants to reverse its current downward trend, the price must break through the range of $100,000 to $101,400 via spot buying and stabilize at that level on the daily chart.
Additionally, the 4-hour chart shows that bulls need to see strong buying support around $100,000 and successfully close above $101,400 to consolidate the upward momentum. If this level cannot be maintained, Bitcoin may retest the support level and buying accumulation area near $98,000.
Analysts at blockchain analysis platform Santiment remain optimistic and posted on X, stating, "Considering BTC is temporarily holding above $100,000, and the decline is not as severe compared to normal fluctuations against the S&P 500, once it stabilizes in the next 24-48 hours, this can actually be interpreted as a strong signal."