December 19, 2024
The Federal Reserve cut interest rates by 25 basis points on December 18, capping them at 4.50%, as expected. While a rate cut is typically seen as positive for cryptocurrencies, the market remains unimpressed.
Cryptocurrencies have fallen 4% in the past 24 hours, reflecting concerns over the Federal Reserve’s forecast for higher inflation in 2025 and its plans for only two interest rate cuts next year.
What do interest rate cuts mean for cryptocurrencies?
The Fed’s updated outlook creates a mixed outlook for digital assets. While lower interest rates suggest a more accommodative monetary policy, expectations of higher inflation and a slower pace of rate cuts dampen optimism.
Investors had been hoping for a faster rate-cutting cycle in 2025, which would have boosted riskier assets like cryptocurrencies.
“Stock and crypto markets have been exploding for over a year with interest rates rising and you’re worried they’re going to stop pumping because the Fed is going to cut as much as I heard someone say they should,” wrote popular influencer ‘Gum’ on X (formerly Twitter).
Last week’s US Consumer Price Index (CPI) data for November, which showed a 2.7% year-over-year increase, briefly lifted market sentiment. Bitcoin surged to an all-time high of $108,000 earlier this week on the back of those inflationary figures, which were in line with expectations.
Wall Street Mav wrote: “The Fed is cutting rates because the U.S. government can’t afford to pay interest on $36.2 trillion in debt. We have a $2 trillion budget deficit. We’re paying over $1.2 trillion in interest on the debt. They probably want inflation to rise even higher. That inflates the debt farther. But it does massive amounts of financial damage to almost everyone.”
The immediate impact heading into the holiday season remains neutral to bearish as markets digest the Fed’s dovish stance. Short-term trading could see increased volatility, especially during thin Christmas liquidity.
However, it is important to remember that the crypto market has been rising all year, despite rising inflation and interest rates. Ultimately, it is all about regulation and institutional adoption. Bitcoin ETFs recently surpassed the total assets under management of gold ETFs.
At the same time, more crypto ETFs are likely to be approved next year. There’s also the potential for Bitcoin reserves and favorable Trump regulations. These will outweigh the impact of deflation and lower interest rates.
A weaker dollar resulting from lower rates could provide some support for Bitcoin and other cryptocurrencies as alternative assets. However, expected inflationary pressure could weigh on investor sentiment.
In the first quarter of 2025, crypto markets are likely to react to additional economic indicators and central bank policies. The continued momentum in Bitcoin’s price will depend on how the Federal Reserve adjusts its approach if inflation expectations rise further.
Until then, the market remains in wait-and-see mode, with muted reactions to what should have been an upside-supporting rate cut.
