Key points to remember

  • The upcoming FOMC meeting on September 17-18, 2024 could introduce significant policy changes that would impact the digital asset market.

  • Lower borrowing costs should create a more favorable investment environment for risky assets such as cryptos, and certain crypto-specific factors, such as post-halving cycles and seasonality, could also sustain positive market momentum.

  • The expected shift in US monetary policy makes investors confident about the potential for renewed growth in digital assets.

The Federal Open Market Committee (FOMC), the monetary policy-setting body of the U.S. Federal Reserve, is scheduled to meet on September 17-18, 2024. Following Federal Reserve Chairman Jerome Powell’s remarks at the recent Jackson Hole conference, where he said that “it’s time” for a policy change, markets are expecting the upcoming FOMC meeting to result in a first interest rate cut, but not the only one.

Such a development is expected to recalibrate the economic sector and will likely have significant implications for crypto markets, which are known for their sensitivity to macroeconomic changes. With lower borrowing costs on the horizon, crypto investors are weighing possible scenarios, including a boost in innovation and growth within the crypto space and a rebound in prices. Some, however, remain cautious in their forecasts. Read on to learn more about the expected interest rate cuts and their potential implications for the digital asset space.

Introduction: Interest Rates and Recent Federal Reserve Policy

Central bank interest rates are crucial in setting monetary policy because they directly influence the entire economy. By adjusting rates, central banks can encourage people and businesses to borrow and spend more money (by lowering rates) or cool an “overheated” economy (by raising rates). These changes ripple out into everything from interest on personal loans and mortgages to investment decisions on Wall Street and prices of consumer goods.

Current US rates are around 5.25%-5.50%, their highest level in 23 years after two and a half years of aggressive measures to fight inflation, which has dropped from 7.1% to a more sustainable 2.5%. After the COVID-19 pandemic, the Federal Reserve has raised rates several times to curb inflation (11 times in just over a year) and contain it without triggering a recession.

As the next FOMC meeting approaches, the financial world is in turmoil: speculation is running high, with analysts and investors all predicting cuts of varying magnitudes.

Prediction markets such as Polymarket also highlight the strong interest of individuals in this topic: as of September 13, 2024, forecasts indicate that many are convinced of an imminent rate cut, with a probability of up to 70% of a 25 basis point cut and a 29% probability of a sharper reduction of more than 50 basis points.

With digital asset prices hovering below the peaks seen just a few months ago, this interest rate cut could be just what the crypto market needs to bounce back; but, as always, past market behavior should not be used to predict future markets.

A boon for crypto prices?

The anticipated rate cuts could significantly influence digital asset prices, as cryptos like Bitcoin have often reacted negatively to rate hikes aimed at curbing inflation. Conversely, rate cuts are generally considered bullish for cryptos, which are categorized as risky assets.

As borrowing costs fall, it becomes cheaper for investors to take out loans, leading to increased liquidity in the financial system. This influx of capital can drive demand for riskier, higher-yielding assets, including cryptocurrencies. For example, between February 2020, when the Fed moved rates closer to zero, and February 2022, when rates started to rise again, the price of BTC exploded: +375%.

In addition to thriving on increased liquidity, Bitcoin can benefit from its anti-inflationary qualities. While the U.S. economy appears relatively robust heading into this rate hike cycle, a resurgence of inflation remains a significant risk.

Lower interest rates can fuel inflation fears, as they typically lead to increased spending and borrowing. In such scenarios, investors may turn to crypto to protect their purchasing power, which would boost demand and prices. Experts predict that the Federal Reserve could cut rates by as much as 175 basis points over the next nine months, a move that would be hugely beneficial for the crypto market.

Additionally, lower interest rates often result in a weaker US dollar. Cryptos are often seen as a hedge against currency devaluation, making them more attractive as an additional store of value when the dollar weakens.

Yet some suggest that rate cuts will not necessarily trigger the positive momentum expected by the most optimistic, noting in particular that their beneficial effects on digital assets are already present. Several observers also argue that rate cuts of varying magnitude could have equally varying effects on cryptos.

By this logic, a standard 25 basis point cut would likely ease recession fears and gradually lift digital asset prices, while deeper cuts could stoke recession fears and put downward pressure on risky asset prices.

Crypto-specific factors

Beyond macroeconomic factors, BTC and other digital assets have their own unique characteristics that could influence their outlook in a falling rate environment. Some of these include hypothetical crypto price cycles and observed seasonality.

The recent Bitcoin halving, which typically results in a BTC price increase 6-18 months later, is a key factor. While past performance is no guarantee of future results, last April’s halving could provide investors with an indicator of where the market is headed. Combined with the potential for a transition from equity to crypto facilitated by the availability of spot ETFs, the increased liquidity resulting from rate cuts could have both the propensity and the means to trickle down into crypto markets.

Outside of the hypothetical post-halving cycle, September is typically one of the months with the lowest activity in digital asset markets, and prices often rally from October onwards. If this dynamic is repeated, the expected rate cuts could provide additional impetus to the price rally.

Conclusion

Overall, do crypto investors have more reason to be optimistic than pessimistic? It is impossible to predict with certainty the impact of the Fed’s rate cuts on the digital asset market, but several indicators suggest that the implementation of the policy changes scheduled for the second half of September would come at a good time for crypto investors.

As the FOMC prepares for its September meeting, expected interest rate cuts could usher in a whole new era of economic recalibration that could boost crypto markets. While the exact outcomes remain unclear, the prospect of lower borrowing costs and increased liquidity is promising for digital assets.

Historical trends and unique crypto-specific factors, such as the recent Bitcoin halving and seasonal market behaviors, add to the optimism around these policy changes, which are believed to catalyze growth and innovation within the crypto space and provide promising prospects for investors.

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