How can the upcoming FOMC meeting impact on crypto?

As a seasoned investor with decades of experience navigating the volatile world of finance, I can attest to the fact that the market sometimes behaves like a spoiled child. It demands constant attention and nurturing, and if it doesn’t get what it wants – in this case, more liquidity from the Fed – it throws a tantrum, causing corrections in Bitcoin and other risk assets.

As the Federal Open Market Committee (FOMC) meeting approaches, might a potential interest rate reduction offer the liquidity surge that Bitcoin requires to rise, or could a more modest cut create unease in the markets instead?

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All eyes on FOMC meeting

preparations are underway for a significant gathering of the Federal Open Market Committee on September 18th, with everyone eagerly waiting to see what the Federal Reserve will decide next.

142,000 new jobs were created in the U.S. economy during August, which is a 28,000 increase compared to July. This slight improvement has contributed to a sense of optimism. Nevertheless, it’s important to note that revisions have reduced the job count by 89,000 from the preceding two months, indicating that the labor market might not be as robust as initially thought.

Job growth through private companies slightly improved by approximately 118,000 positions, and the jobless rate experienced a slight decrease to 4.2%, primarily due to the conclusion of temporary layoffs.

Regarding inflation, we’re seeing a mixed scenario. The Consumer Price Index (CPI) for August dropped to its lowest point since February 2021, settling at 2.5% annually, just shy of the predicted 2.6%. This means that prices for consumer goods are growing at a slower rate than previously anticipated.

Surprisingly, the inflation rate without considering food and energy costs increased by 0.3% during the month, which surpassed initial predictions.

In this scenario, the Federal Reserve finds themselves in a delicate predicament. Although general inflation seems to be easing, persistent core inflation, which they’ve termed as a bother, remains unchanged at 3.2%.

With speculation running high about the Federal Reserve’s next move, some anticipate a reduction of 0.25%, while others suggest it might be as much as 0.5%. Given this uncertainty, how might the crypto market react? Let’s explore the possible outcomes and insights from experts on what lies ahead.

How much will the Fed cut rates?

Historically, reductions in interest rates have often stimulated growth in riskier investments, and there’s anticipation that this could also be the case with digital assets such as Bitcoin (BTC) at present. However, the extent of any rate reduction by the Federal Reserve will significantly influence how financial markets respond.

Currently, traders are divided into two schools of thought regarding potential interest rate adjustments: some favor a reduction by 0.25%, while others advocate for a more substantial decrease by 0.5%.

Based on data from the CME Watchtool on September 16, there’s approximately a 41% likelihood that the Federal Reserve will lower interest rates by 0.25 percentage points, making the rate fall within the 5% to 5.25% range. On the other hand, there’s around a 59% probability that they might choose a more substantial cut of 0.5 percentage points, pushing the rates into the 4.7% to 5% range instead.

10x Research analysts suggest that rather than invigorating markets, a 50 basis point reduction in interest rates could instead trigger market unease. This is because such a substantial adjustment may imply that the Federal Reserve is concerned about the economy’s health, which might lead investors to become more cautious when it comes to investing in riskier assets like Bitcoin.

As a crypto investor, I find myself anticipating a wave of selling in both cryptocurrencies and stocks. This could be due to traders taking a step back and preparing for potential economic hardships on the horizon.

In essence, the way the cryptocurrency market responds is largely determined by the expectations that traders have built so far. Following the decision, everyone will closely watch and analyze remarks made by Federal Reserve Chair Jerome Powell, hoping to gain insights into potential future developments.

What’s next for Bitcoin? 

In anticipation of the Federal Reserve’s upcoming decision on interest rate cuts, Bitcoin has found it challenging to surpass a significant barrier in its price movement.

For nearly a month starting from early August, Bitcoin has consistently struggled to break through the resistance at $62,000. As of September 16th, its value has dropped by approximately 2% and is currently holding steady at roughly $58,600.

As per well-known macro trader Craig Shapiro, this price movement appears to be significantly linked to the ongoing need for market liquidity, a concept he terms as the “PALM,” or the “continuously escalating liquidity mechanism.

In simpler terms, Shapiro suggests that the market behaves somewhat irrationally, similar to a frustrated child, by shedding risky investments when it feels there isn’t enough support in the form of liquidity from the Federal Reserve.

As a researcher, I share Shapiro’s perspective that the Federal Reserve (Fed) should implement a 0.5 percentage point reduction in interest rates to cater to the market’s demand for liquidity. A more modest 0.25 percentage point cut, on the other hand, could potentially fall short of investor expectations, potentially causing further adjustments in Bitcoin and other risk assets.

Basically, investors are searching for the “intervention point” set by the Federal Reserve – the specific level where the Fed intervenes to halt or minimize a significant economic decline.

As a crypto investor, I’ve noticed that a larger 50 basis points reduction in interest rates might alleviate immediate financial strains, but it could also signal more profound economic issues. In the past, significant cuts like this have often suggested that central banks are concerned about a slowing economy. Such concerns, historically, have tended to spark sell-offs rather than rallies.

It’s interesting to note that although additional liquidity can boost asset prices, pouring it in too rapidly might unexpectedly cause them to drop instead.

There is hope for Bitcoin bulls, though. According to crypto analyst Miles Deutscher, Q4 has historically been the strongest quarter for both the S&P 500 and Bitcoin. 

From 1945 onwards, the S&P 500 has typically increased by about 3.8% during the fourth quarter and experienced growth approximately 77% of the time. In comparison, Bitcoin has shown a striking increase of 88.84% in Q4, and in years where it underwent halving similar to 2016 and 2020, it achieved impressive gains of 58.17% and 168.02%, respectively.

Historically, Bitcoin has experienced its poorest performance during Quarter 3. However, there’s a possibility that Quarter 4 might see a recovery, particularly if the Federal Reserve’s predicted interest rate cut materializes as expected.

As a researcher, I acknowledge that while the Federal Reserve’s actions may provide stability, there still lingers an element of uncertainty. If their actions fall short of expectations or if broader economic conditions deteriorate, volatility could potentially re-emerge as a significant risk factor.

What lies ahead

Following the Federal Reserve’s decision on September 18th, the main point of interest will shift towards Federal Chairman Powell’s remarks. Depending on his views about potential future interest rate reductions, these comments could either pave the way for a robust Q4 market surge or maintain an air of uncertainty among investors.

If Powell suggests further interest rate reductions, it could provide the necessary boost for Bitcoin and similar high-risk investments to rise. Conversely, if he adopts a conservative stance, we might witness increased volatility in the markets.

Meanwhile, the upcoming U.S. presidential election in November also brings an additional level of intricacy to the situation.

Donald Trump, the Republican candidate, has publicly endorsed cryptocurrencies by initiating his own venture, World Liberty Financial, and backing other crypto-related projects. This proactive approach towards cryptos may draw in supporters who are keen on a regulatory climate that is supportive of digital currencies.

Meanwhile, Vice President Kamala Harris, the Democratic nominee, has kept relatively quiet about cryptocurrencies, leaving her stance on the matter somewhat ambiguous.

In the upcoming election, the contrasting strategies of the two candidates might significantly impact the cryptocurrency market, as investors carefully consider their choices when looking towards 2025.

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2024-09-17 15:09