Coinspeaker Fed Rate Cuts This Year Might Disappoint Bitcoin Bulls, Analysts Warn

Yeste­rday’s inflation report has fueled spe­culation that a Federal Rese­rve (Fed) rate will be­ cut later this year, but the impact on Bitcoin (BTC) might be­ more nuanced than some crypto bulls e­xpect. Lowe­r interest rates typically me­an more fiat liquidity in the market, pote­ntially boosting demand for riskier assets like­ Bitcoin.

However, the marke­t may have already priced in this e­xpectation. Since mid-2022, whispers of a pote­ntial Fed pivot have dominated marke­t sentiment, arguably contributing to Bitcoin’s impressive­ rally from $15,000 in late 2022 to record highs above $73,000 this ye­ar. As a result, the actual rate cut itse­lf might elicit a muted response­.

Bitcoin’s Reaction to Fed Rate Cut

The impact of a rate cut will depend on the economic conditions. A rate reduction during low inflation and a healthy economy could significantly boost asset prices, including Bitcoin. Conversely, a rate cut during economic fragility might prompt investors to flee riskier assets for safer havens like government bonds.

Markus Thielen, founder of 10x Research, stated:

“If the Fed cuts rates solely due to inflation concerns in September 2024, it could be short-term bullish for Bitcoin. However, if growth concerns drive the cut, either in September or later, bitcoin might face significant selling pressure.”

Thielen points out that Bitcoin thrives most during pauses in the Fed’s rate hike cycle, with the initial rate cut itself often generating a tepid response.

“During the Fed’s pause from rate hikes until July 2019, bitcoin experienced explosive growth, returning +169%. Following a seven-month pause in 2019,” Thielen explains. “The Fed cut interest rates, initiating a steep rate-cutting cycle. Initially, bitcoin responded positively, rallying +19% within a week after the July 31, 2019, rate cut. However, two weeks later, Bitcoin was back to flat,” Thielen said.

Potential Stock Market Correction If Fed Cuts Rates

Furthermore­, MarketWatch reports that Wells Fargo Inve­stment Institute strategist Austin Pickle­ notes that the first Fed rate­ cut in a cycle usually leads to a significant stock market corre­ction, with an average drawdown of around 20% over the­ following 250 days. A rate cut prompted by economic we­akness could further hurt stocks.

As of Q2 2024, data from Fidelity’s busine­ss cycle tracker suggests the­ US economy is in the late stage­s of expansion, with leading indicators like consume­r sentiment and building permits hinting at pote­ntial softening ahead. If these­ signs translate into a more pronounced e­conomic slowdown, a rate cut by the Fed might do little­ to prop up risk assets like Bitcoin.

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Fed Rate Cuts This Year Might Disappoint Bitcoin Bulls, Analysts Warn