Key Points
- Speculations of a Federal Reserve rate cut this year could have a complex impact on Bitcoin.
- Bitcoin’s reaction to the rate cut will depend on the prevailing economic conditions.
The inflation report released yesterday has sparked discussions about a possible rate cut by the Federal Reserve (Fed) later this year.
However, the effect on Bitcoin (BTC) could be more intricate than some cryptocurrency enthusiasts anticipate. Lower interest rates typically result in an increase in fiat liquidity in the market, which could potentially boost demand for riskier assets like Bitcoin.
Market Expectations and Bitcoin’s Price
There’s a possibility that the market has already factored in this expectation. Since mid-2022, rumors of a potential Fed pivot have dominated market sentiment. This has arguably contributed to Bitcoin’s significant rally from $15,000 in late 2022 to record highs above $73,000 this year. As a result, the actual rate cut might trigger a subdued response.
The effect of a rate cut will largely depend on the economic conditions at the time. A rate reduction during a period of low inflation and a robust economy could significantly boost asset prices, including Bitcoin. On the other hand, a rate cut during a period of economic instability might prompt investors to abandon riskier assets for safer havens such as government bonds.
Markus Thielen, founder of 10x Research, stated that 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.
Bitcoin’s Previous Reactions to Rate Cuts
Thielen further added that Bitcoin tends to thrive during pauses in the Fed’s rate hike cycle. The initial rate cut often results in a lukewarm response. He explained that during the Fed’s pause from rate hikes until July 2019, Bitcoin experienced explosive growth, returning +169%. Following a seven-month pause in 2019, 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.
Impact on the Stock Market
In addition, reports from MarketWatch suggest 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 that 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.
