The Federal Reserve cut rates by 25 basis points on December 18, setting the upper limit at 4.50%, in line with expectations. Although rate cuts are generally bullish for cryptocurrencies, the market reacted mildly.
In the past 24 hours, cryptocurrencies have fallen by 4%, reflecting market concerns over the Federal Reserve's upward revision of 2025 inflation expectations and plans for only two rate cuts next year.
What does interest rate cut mean for cryptocurrencies?
The Federal Reserve'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 slowing pace of rate cuts temper 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 over the past year, with high interest rates, and you worry they might stop rising because the Federal Reserve will cut rates significantly as some have said," popular influencer 'Gum' wrote on X (formerly Twitter).
The November U.S. Consumer Price Index (CPI) released last week showed a year-on-year increase of 2.7%, briefly boosting market sentiment. Bitcoin reached a new high of $108,000 earlier this week, thanks to inflation data meeting expectations.
However, this enthusiasm seems to have faded, with macro uncertainty taking center stage.
"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 pay $1.2 trillion in debt interest. They may want inflation to rise significantly. That would devalue the debt. But this would cause huge economic losses for others," Wall Street Mav wrote.
Impact on Christmas and Q1 2025
As the holiday season approaches, short-term impacts remain neutral to bearish as the market digests the Federal Reserve's cautious stance. Short-term trading may see greater volatility, especially during the low liquidity periods 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 due to regulatory and institutional adoption. Bitcoin ETFs have recently surpassed the total assets under management of gold ETFs.
Bitcoin ETF weekly net inflow.
Meanwhile, more cryptocurrency ETFs are expected to be approved next year. There may also be favorable regulations regarding Bitcoin reserves and Trump. These will offset the effects of rate cuts and smaller reductions.
Additionally, a weaker dollar may provide some support for Bitcoin and other cryptocurrencies as alternative assets. However, expected inflation pressures may affect investor sentiment.
In Q1 2025, the cryptocurrency market is likely to react to further economic indicators and central bank policies. The continued upward momentum of Bitcoin prices depends on whether the Federal Reserve adjusts its approach, particularly if inflation expectations rise further.
Prior to this, the market remained cautious, responding mildly to what should have been a bullish rate cut.
[Disclaimer] Markets come with risks, and investors should exercise 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. Investment based on this carries responsibility.