Bitcoin and the Crypto Markets Slump as Fed Faces Tough Rate Cut Decision

Bitcoin and other cryptocurrencies are taking a hit as the market braces for a potential larger-than-expected rate cut by the Federal Reserve. In the past 24 hours, bitcoin has dropped 3% and is currently trading at $58,000, while ether is down 3.5% to $2,300. The downturn comes as the probability of a 50 basis point rate cut by the Fed this Wednesday has surged to 61% from only 14% last Wednesday, based on Fed funds rates, according to CME data. Meanwhile, the likelihood of a smaller 25 basis point cut is at 39%.

The sharp increase in the odds of a more aggressive rate cut has rattled the crypto market, reflecting growing fears that the economy may be in worse shape than previously thought. The possibility of a 50 basis point cut, which would be the first significant move of this kind since 2020, has led to uncertainty and selling pressure among investors.

Adding to the tension, three Democratic senators, including Elizabeth Warren (D-Mass.), are urging the Fed to cut rates by 75 basis points, warning that a more cautious approach could push the economy closer to a recession. In a letter on Monday to Fed Chair Jerome Powell, the senators emphasized that with inflation trending down and signs of a cooling labor market, the Fed should act decisively to mitigate potential risks. They argue that front-loading rate cuts is essential to avoid a potential economic crisis, writing that “Employment numbers adjust slowly, so the Fed should front-load rate cuts to avoid sliding towards a potential crisis.”

With a bit of sarcasm, Marc Andreessen, the general partner of venture capital firm a16z, posted on X: “I strongly endorse Senator Warren’s demand for an immediate 75 basis point rate cut & corresponding skyrocketing equity prices.”

Market experts argue that a 50 basis point cut is the best course of action for the Fed. Bill Dudley, former president of the Federal Reserve Bank of New York, argued in a Bloomberg column Monday that a 50 basis point cut makes the most sense, as it would help the Fed align its rate policy with economic projections and avoid sending mixed signals to the market. Dudley believes that given the current economic conditions, a larger cut is needed to correct the disparity between the Fed’s policy and the neutral rate.

Greg Ip, the chief economics commentator at The Wall Street Journal, also supports a 50 basis point cut, but for slightly different reasons. He points out that with inflation already cooling and the labor market softening, the Fed should act decisively rather than wait for more evidence of a recession. Ip noted that delaying action could be riskier, potentially leading to a situation where the Fed is forced to make even larger cuts later on that might be too late to be effective.

With the final decision set for Wednesday, the financial world is watching closely. Whether the Fed opts for a 25 or 50 basis point cut, the decision is expected to have a significant impact on the crypto market, and could indicate how close the U.S. economy is to being in a recession.