Federal Reserve Cuts Interest Rate for First Time in Four Years, Bitcoin Reacts
On Wednesday afternoon, the US Central Bank (Federal Reserve) cut interest rates by 50 bps, marking the start of its dovish cycle. The cut, which has lowered the federal funds rate to 4.75%, was decided during the periodic Federal Open Market Committee (FOMC) meeting. Before yesterday, the Fed hadn’t cut interest rates in four years.
So, how has Bitcoin reacted to the rate cut announcement? According to data from CoinGecko, BTC has surged 4.3% in the past 24 hours to trade at $62,344 as of this writing. Similarly, Ethereum is priced at $2,434 after rallying 5.2%. Solana and Avalanche have seen the most gains today. SOL is up 7.4% to $139, while AVAX has risen 12% to $26.19.
In a statement, the FOMC noted that inflation had made significant progress toward the Fed’s 2% target but acknowledged that more work had to be done to bring it down to preferred levels. Fed Chair Jerome Powell, on the other hand, said during his press conference that recent reports indicated a growing US economy, thus fueling the necessity to adopt new monetary policies.
However, he added that while risks associated with inflation had decreased, the risks to employment were on the rise.
FOMC’s Economic Projections
After announcing its interest rate cut, the Fed published FOMC’s Summary of Economic Projections, which indicated that the committee members are optimistic about the federal funds rate settling at 4.5% by the end of 2024. By comparison, the committee’s projections published in June suggested that the rate would drop to 5% by the end of this year.
Meanwhile, the FOMC has projected that the federal funds rate will decline to 3.25% by the end of next year.
Fed’s Hawkish Monetary Policies
As mentioned, Wednesday’s interest rate cut marks a shift in the Federal Reserve’s fight against inflation. Prior to that, the US Central Bank had employed hawkish monetary policies to lower the inflation rate, which hit 9.2% at some point in 2022. The financial regulator increased interest rates by 25 bps several times between 2022 and 2023.
The Fed’s hawkish monetary policies appeared to have worked out as expected, according to a recent report, which showed that inflation has been at 2.5% over the past 12 months.
Fed’s Rate Cut Surprises Traders
The Federal Reserve’s decision to cut rates by 50 basis points came as a surprise to many traders who had predicted that the rates would be lowered by only 25 bps, according to the CME FedWatch Tool.
In his press conference, the Fed Chair recognized that the interest rate cut was huge. However, he said it showed the FOMC’s confidence in inflation going below 2% over the coming months.
Meanwhile, Bitwise’s Chief Investment Officer Matt Hougan, who was among the few who anticipated a rate cut by 50 basis points, noted massive inflows into Bitcoin spot exchange-traded funds after the Fed’s announcement. On his X account, he claimed that BTC had established itself as a reliable investment for investors looking for risky assets.
What Fed’s Decision Means for Bitcoin
Financial analysts say the US dollar will weaken as the Federal Reserve lowers interest cuts in the coming months. As a result, the value of risk-on assets like Bitcoin and Gold will increase. James Butterfill, the Head of Research at CoinShares, said earlier today that yesterday’s rate cut is bullish for crypto as it will reduce borrowing costs, allowing investors to assess money for investment cheaply.
While others fear that the 50-bps rate cut will cause the US economy to slow down, Butterfill, on the other hand, believes that the Fed made the right decision, which, according to him, will keep the American economy on track.
Samir Kerbage, Hashdex’s Chief Investment Officer, is another analyst who is bullish on Bitcoin following the Fed’s rate cut. He argues that dovish monetary policies will benefit crypto and gold despite uncertainty over the US presidential elections.
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