By Michael Scott
With the Federal Reserve easing interest rates within touching distance, the crypto world is fixated on the possible outcome for investment.
Investors across leading markets expect the US Federal Reserve to announce the long-awaited interest rate cut. However, as Chair Jerome Powell leads the Fed in a two-day meeting to ascertain how big the initial cut is, the broad loosening of the financial conditions is fueling the market optimism. But why does the digital assets space appear so fixated on the Federal Open Market Committee (FOMC) meeting?
Wednesday emerges a pivotal moment for the markets as the US central bank announces a slash on their 23-year high interest rates. The reversal from the hike cycle that began in 2022 is poised to have wide implications across leading markets.
Powell has overseen the Fed’s borrowing cost hike to curb inflation that skyrocketed since the Covid-19 pandemic. With the job market data showing a stronger spell, speculation is live that the Fed plan is lowering the interest rates. Experts rule out that the rate-cut cycle will plunge the economy into unprecedented recession.
The markets are eager for the rates to drop as the Fed concludes the two-day meeting on Wednesday. The primary concern is what rate cuts mean for crypto. And Why is the FOMC meeting dominating the investors’ talk?
Like other risk-on assets, such as stocks, Bitcoin primarily benefits from the lower interest rates. Crypto investments resemble US equities, particularly tech stocks, experiencing volatile price movements.
The move by the US central bank to adopt a hawkish policy led to an aggressive hike in interest rates. The rate increment allocated money to other places, including bonds and treasury bills, attractive and a priority.
The crypto market movement largely mirrors the US equities – particularly now. A September 12 disclosure by K33 Research affirmed that the 30-day correlation between the S&P 500 and Bitcoin is at levels unseen since October 2022.
The correlation shows that crypto assets appear more sensitive to the Fed’s policy than ever. Such explains why the digital assets space seems so focused on Wednesday events.
Crypto trading firm Wintermute’s over-the-counter trader Jake Ostrovskis indicates that a cut is a pivotal monetary policy that could bolster crypto.
Ostrovskis considers that historically, a cut yields increased liquidity within the financial system that tends to optimize benefits for risk-on assets such as Bitcoin. It implies that as more investors desire to take risks, they will allocate more money to the space. Such allocation could propel the price of digital assets upwards.
Markets Keen to Discover the Cut Size
The analysts are fixated on discovering how big the rate cut will be. The markets are pricing a cut on a 25 or 50 basis, each making a difference for crypto and other risk-on assets.
FalconX senior researcher David Lawant considers the crypto correlations to the general risk assets at an 18-month high. It prompts crypto investors to remain watchful of the prevailing economic trends.
Lawant adds that if the Fed announced a 50 basis-point reduction, the risk assets would surprisingly realize an unexpected boost. The researcher’s sentiment resonates with a Monday, September 16 letter by leading crypto critic lawmaker Senator Elizabeth Warren who, alongside two senators, urged the Fed chair to consider a 75-basis point reduction. The Massachusetts Senator reasons that anything lower than the 75-basis point could plunge the economy into a recession.
Leading economist at BIT Mining Limited, Youwei Yang, holds that the magnitude of rate reduction could impact the market liquidity. Similarly, the rate cut could have widespread implications on the investor sentiment and attractiveness of the risk-on assets.
Ostrovskis acknowledges that the cut sizes hardly matter more than the longer-term outlook on the interest rate. Such attention extends to how long the cutting cycle will last and the FOMC perspective on the US labor market.