Key Points
- The United States Federal Reserve is expected to implement a 25-basis-point rate cut next Wednesday.
- This rate cut could trigger a “sell-the-news” event for risk assets like Bitcoin (BTC).
The United States Federal Reserve is predicted to introduce a 25-basis-point rate cut in the upcoming Federal Open Market Committee (FOMC) meeting on September 18.
Simultaneously, renowned economist Steve Hanke suggests that this could initiate a “sell-the-news” event for risk assets like Bitcoin (BTC).
Market Anticipation of the Rate Cut
Hanke states, “A 25-basis-point cut is already anticipated by the market, which means the actual cut might underwhelm, triggering a sell-the-news response.” He adds that a 50-basis-point cut is not factored in and if it were to occur, it would probably give the market a lift.
As per the CME FedWatch tool, there is a 57% probability of a 25 bps cut and a 43% chance of a 50 bps reduction. Hanke believes that Bitcoin and other risk assets could face significant volatility in the months leading up to the US elections.
He advocates for fixed-income investments, such as the 10-year US Treasury bond and gold, as a safeguard against potential market volatility. Leena ElDeeb, an analyst at 21Shares Research, also shares her viewpoint on the interest rate cut.
Potential Impact of a 50-Basis-Point Cut
ElDeeb believes a market move could be triggered if the Federal Reserve opts for a 50 bps cut. She also notes that this could lead to investor caution as a 50-basis-point cut could signal that the Fed is responding to recessionary warning signs.
“A more aggressive rate cut could shock the markets, given that it would ring alarm bells for a recession. Investors would trade cautiously to weather market conditions, which could hurt risk-on assets in the short term,” ElDeeb wrote in an email.
Several entities, including former New York Federal Reserve President Bill Dudley, support the 50 bps cut proposal. Dudley noted a strong case for whether the Federal Reserve will implement it or not.
He explained that the current interest rate is 150-200 basis points above the neutral rate for the US economy. At this neutral rate, monetary policy is neither restrictive nor accommodative.
As of now, Bitcoin is trading at $57,872.34, up 0.17% in the last 24 hours. In the event of a rate cut, BTC and other inflation hedges will likely surge. This is because rate cuts tend to devalue the US Dollar, which will enhance the hedge appeal of BTC.
