Analysts Give Warning on Fed Rate Cuts Affecting Bitcoin

Crypto analysts have warned Bitcoin Bulls about the possibility of being disappointed by the Fed rate cuts in 2024.

The inflation report released yesterday has reignited speculation that the Federal Reserve (Fed) will reduce its interest rate later this year. However, the potential consequences for Bitcoin (BTC) may be more complex than anticipated by some crypto enthusiasts. Lower interest rates generally result in increased fiat liquidity in the market, which could increase demand for speculative assets such as Bitcoin.

Nevertheless, the market may have already factored in this expectation. The market has been dominated by rumors of a potential Fed pivot since mid-2022, which may have contributed to Bitcoin’s remarkable rise from $15,000 in late 2022 to record highs exceeding $73,000 this year. Consequently, the actual rate reduction may generate a subdued reaction.

Bitcoin’s Response to the Federal Reserve’s Rate Cut

The economic conditions will determine the impact of a rate reduction. A substantial increase in asset prices, including Bitcoin, could result from a rate reduction during periods of low inflation and a robust economy. Conversely, investors may abandon riskier assets in favor of safer havens such as government bonds in response to a rate reduction during economic fragility.

Markus Thielen, the originator 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 observes that Bitcoin experiences the most significant growth during periods of uncertainty in the Federal Reserve’s rate increase cycle, with the initial rate reduction frequently eliciting a subdued reaction.

Bitcoin experienced a remarkable surge in value, with a return of +169%, during the Federal Reserve’s hiatus from rate increases until July 2019. Thielen elaborates, “This was after a seven-month hiatus in 2019.” “Initiating a rapid rate-cutting cycle, the Federal Reserve reduced interest rates.” Initially, bitcoin responded favorably, experiencing a +19% increase within a week of the July 31, 2019, rate cut. Nevertheless, two weeks later, Bitcoin returned to its previous level of stagnation,” Thielen stated.

The possibility of a stock market correction if the Federal Reserve reduces interest rates

Additionally, MarketWatch discloses that Austin Pickle, a Wells Fargo Investment Institute strategist, observes that the initial Federal Reserve rate reduction in a cycle typically results in a substantial stock market correction, with an average decline of approximately 20% over the subsequent 250 days. An additional decline in equities may result from an interest rate reduction precipitated by economic weakness.

According to data from Fidelity’s business cycle tracker, the United States economy is currently in the late stages of expansion as of Q2 2024. Leading indicators, such as consumer sentiment and building permits, imply that there may be a softening shortly. If these indicators result in a more pronounced economic slowdown, a rate reduction by the Federal Reserve may not significantly impact risk assets such as Bitcoin.