The Federal Reserve (Fed) recently cut interest rates by 25 basis points, lowering the benchmark to a range of 4.25% to 4.5%. This decision came after inflation eased but remained above the Fed’s 2% target. Despite the rate cut, Fed officials indicated that future reductions might occur at a slower pace.
A “hawkish cut” refers to an interest rate reduction combined with signals that future rate cuts will be limited or slow. The term “hawkish” implies that policymakers remain concerned about inflation and are reluctant to lower rates aggressively. This contrasts with a “dovish cut,” where the Fed signals more willingness to reduce rates further.
Upon Fed rate cut decision, policymakers like San Francisco Fed President Mary Daly said that the “recalibration phase” is over, suggesting future cuts will be slower. Daly noted that inflation is still elevated, and the labor market remains strong, reducing the urgency for aggressive rate cuts.
How Does This Affect Bitcoin and Crypto Markets?
Cryptocurrencies, including Bitcoin, are sensitive to changes in interest rates. Lower rates typically increase liquidity, encouraging investors to seek higher returns in riskier assets like Bitcoin. Conversely, higher rates or slower cuts can reduce liquidity, making speculative assets less attractive.
Following the Fed’s announcement, Bitcoin briefly dropped below $100,000. This decline occurred despite Bitcoin previously rising 50% since November 5, driven by optimism over Trump’s pro-crypto nature. Historically, Bitcoin tends to perform well during periods of monetary easing, but this time, the Fed’s outlook tempered the market’s positive movement.
Crypto Market Fell After Fed Announced Rate Cut
Today, Bitcoin fell by 1.3%, trading at around $95,790.81. This represents an 8.3% drop since a week ago.
Bitcoin fell below $100k after Fed rate cut announcement. Source: CoinMarketCap
Traders interpreted Fed Chair Jerome Powell’s comments as signaling a more conservative path forward.
The Fed rate cut also affected other cryptocurrencies, including Ethereum, XRP, and Solana and the overall crypto market cap fell by 1.3%. Analysts cited Powell’s remarks and the slower pace of rate cuts as primary reasons for the decline.
Why Does the Fed’s Decision Matter for Bitcoin?
Bitcoin and other cryptocurrencies thrive in low-interest-rate environments where borrowing is cheaper, and investors are more willing to take risks. When rates rise or remain high, riskier assets often experience sell-offs as investors seek safer returns. The Fed’s hawkish tone signals that liquidity may remain tight, which could limit Bitcoin’s growth.
However, some analysts remain optimistic. Aurelie Barthere, a research analyst at Nansen, noted that the current price correction appears orderly, suggesting investors might use the dip as a buying opportunity. Barthere predicts Bitcoin could stabilize around $90,700 to $91,000, citing post-election support levels.
Amid the Downturn, Trump Administration Is a Positive Factor
President-elect Donald Trump’s administration is expected to influence crypto markets. Trump’s proposal for a strategic Bitcoin reserve has captured attention, but Powell clarified that the Fed cannot directly participate in such initiatives. Establishing a Bitcoin reserve would require congressional approval or an executive order.
Republican Senator Cynthia Lummis recently introduced a bill to create a U.S. Bitcoin reserve, proposing annual purchases of 200,000 bitcoins until the reserve reaches one million tokens. This policy could provide long-term support for Bitcoin prices.
Additionally, Trump has nominated Pro-crypto candidate Paul Atkin as SEC chair, who will replace current SEC chair Gary Gensler. Trump has also nominated Bo Hines to the newly formed Crypto Policy Council. By nominating these personalities, Trump is making a point of surrounding himself with pro-crypto voices. This might help him make the U.S the “Bitcoin Superpower of the world”, as he promised during his campaign.
