After yesterday’s inflation report, the likelihood of the Fed cutting rates to begin this year has become increasingly likely.
The consensus in the crypto market community is that rate cuts, likely to begin in September, will boost fiat liquidity and stimulate interest in Bitcoin.
While this sounds plausible, the market may have already priced in any easing. Expectations of rate cuts have dominated crypto and traditional market sentiment since the second half of 2022 and have been one of the key catalysts for Bitcoin’s surge from a 2022 low near $15,000 to an all-time high of over $73,000 this year. As a result, an actual rate cut may only elicit a modest reaction from the market.
What may be more important is the context of the rate cut.
If a rate cut occurs during a period of low inflation and economic prosperity, the stimulus to asset prices may be more pronounced. Rate cuts at a time when the economy is showing signs of fragility may send a negative signal, prompting investors to move funds from riskier assets to safer assets such as government bonds.
"If the Fed cuts rates in September 2024 simply because of inflation concerns, this could be a short-term positive for Bitcoin. However, if economic growth concerns lead to rate cuts, whether in September or later, Bitcoin could face significant selling pressure."
Historically, Bitcoin has risen the most when the Fed pauses its rate hike cycle. The first rate cut usually causes a tepid response.
The U.S. stock market has also shown a similar trend.
"The arrival of the Fed's rate cut cycle tends to coincide with a sharp decline in the stock market," said Austin Pickle, a strategist at Wells Fargo Investment Institute, last month. "Since 1974, the stock market has fallen an average of about 20% within 250 days of the Fed's first rate cut."
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