Bitcoin Could Face Concerns with Potential 0.50% Fed Rate Cut, Caution from 10X Research

September 9, 2024

An imminent Federal Reserve (Fed) rate cut might not be the reassuring move it appears to be, potentially signaling underlying economic concerns rather than offering stability, a development that could impact risk assets like bitcoin, as per analysis from 10x Research.

The current market sentiment indicates a less than 30% probability of a 50 basis point rate reduction in the upcoming week, reflecting cautious optimism among traders.

Following the release of Friday’s U.S. jobs report, expectations are mounting for the Fed to initiate interest rate cuts, with the initial adjustment likely to occur in the coming week.

If the Fed opts for a 50 basis point rate reduction on September 18, it could mark the beginning of a liquidity easing cycle that might not bode well for risk assets, including cryptocurrencies like bitcoin, according to insights from 10x Research.

Central banks typically implement interest rate adjustments in increments known as “basis points,” with 25 basis point changes being the norm. However, more significant adjustments, such as 50 or 75 basis points, are occasionally employed during periods of urgency, as seen during the 2022 tightening cycle when the Fed enacted multiple 50 and 75 basis point hikes to combat inflation, prompting risk aversion in financial markets.

A 50 basis point rate reduction next week could indicate growing economic apprehensions or a perception of lagging behind in addressing an impending economic slowdown, potentially leading investors to reduce their exposure to risk assets such as bitcoin (BTC) and stocks.

While a 50 basis point cut by the Fed may raise concerns within the markets, the primary focus for the Fed would be on managing economic risks rather than solely reacting to market dynamics, according to Markus Thielen, the founder of 10x Research.

The Chicago Mercantile Exchange’s (CME) FedWatch tool currently suggests a nearly 30% likelihood of a 50 basis point rate cut next week, with Thielen highlighting the increasing sentiment that the Fed may be trailing behind economic indicators, potentially necessitating more substantial interventions.

Macro trader Craig Shapiro emphasized that a 50 basis point cut might not be the ideal starting point for the Fed, cautioning that it could signal panic in an economy that may not require such drastic measures immediately.

Historical data indicates that the initiation of a rate-cutting cycle, regardless of the initial adjustment’s magnitude, does not always lead to a positive impact on asset prices. The anticipation of Fed easing has been a significant driver behind bitcoin’s upward trajectory since January 2023, raising questions about whether the rate cut has already been factored into current market prices.