“A September rate cut driven purely by inflation concerns could offer a short-term bullish spark for Bitcoin,” says Markus Thielen, founder of 10x Research.
Yesterday’s inflation report has fueled speculation that a Federal Reserve (Fed) rate will be cut later this year, but the impact on Bitcoin (BTC) might be more nuanced than some crypto bulls expect. Lower interest rates typically mean more fiat liquidity in the market, potentially boosting demand for riskier assets like Bitcoin.
However, the market may have already priced in this expectation. Since mid-2022, whispers of a potential Fed pivot have dominated market sentiment, arguably contributing to Bitcoin’s impressive rally from $15,000 in late 2022 to record highs above $73,000 this year. As a result, the actual rate cut itself might elicit a muted response.
Bitcoin’s Reaction to Fed Rate Cut
The impact of a rate cut will depend on the economic conditions. A rate reduction during low inflation and a healthy economy could significantly boost asset prices, including Bitcoin. Conversely, a rate cut during economic fragility might prompt investors to flee riskier assets for safer havens like government bonds.
Markus Thielen, founder 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 points out that Bitcoin thrives most during pauses in the Fed’s rate hike cycle, with the initial rate cut itself often generating a tepid response.
“During the Fed’s pause from rate hikes until July 2019, bitcoin experienced explosive growth, returning +169%. Following a seven-month pause in 2019,” Thielen explains. “The Fed cut interest rates, initiating a steep rate-cutting cycle. Initially, bitcoin responded positively, rallying +19% within a week after the July 31, 2019, rate cut. However, two weeks later, Bitcoin was back to flat,” Thielen said.
Potential Stock Market Correction If Fed Cuts Rates
Furthermore, MarketWatch reports that Wells Fargo Investment Institute strategist Austin Pickle notes that the first Fed rate cut in a cycle usually leads to a significant stock market correction, with an average drawdown of around 20% over the following 250 days. A rate cut prompted by economic weakness could further hurt stocks.
As of Q2 2024, data from Fidelity’s business cycle tracker suggests the US economy is in the late stages of expansion, with leading indicators like consumer sentiment and building permits hinting at potential softening ahead. If these signs translate into a more pronounced economic slowdown, a rate cut by the Fed might do little to prop up risk assets like Bitcoin.
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