Crypto Market Drops 16% Since Fed Cut Rates: Rising U.S. Treasury Yields

This $500 billion, or 13.6%, loss in barely a week shows how increasing U.S. Treasury rates tighten financial conditions and crush speculative assets like cryptocurrency. We examine how and why this is occurring.

The Federal Reserve lowered its benchmark federal funds rate by 0.25% at its December 17-18 meeting to 4.25%–4.50%. This may appear dovish, but the FOMC statement and economic predictions issued at 2:00 p.m. ET on December 18 were cautious. In the FOMC statement, the Fed noted that inflation remained high, especially in services, and maintained its long-term aim of 2% inflation. The FOMC's median prediction for the federal funds rate by 2025 is 3.9%, indicating that tight monetary policy will need to last longer than expected.

Projections issued with the announcement clarified the Fed's position. The “dot plot” revealed that policymakers expect just two more rate cuts in 2025, lowering the federal funds rate to 3.9% by year-end. The Fed now expects tight monetary policy to last longer than projected, a major change from the September 2024 meeting, when four cuts were expected.

The newest data shows sustained inflationary pressures, supporting the Fed's caution. The Bureau of Economic Analysis' November 2024 “Personal Income and Outlays” report showed that annual core PCE inflation—the Fed's favored measure—remained constant at 2.8%, surprising forecasts of a drop. This was the seventh month of core PCE inflation over 2.5%.

The bond market responded strongly to Fed message. The 10-year Treasury note yield jumped from 4.40% on December 17 to 4.56% on December 23. Rising yields indicate market reevaluation of monetary policy, inflation, and economic development.

Financial conditions tighten with higher Treasury rates. Cryptocurrencies flourish amid plentiful liquidity, but increasing rates diminish liquidity as investors choose safer, higher-yielding fixed-income assets.

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