Fed Cuts Rates for First Time Since 2020; Bitcoin Remains Mostly Flat

The U.S. Federal Reserve cut interest rates for the first time in four years — slashing its target rate by 50 basis points on Thursday afternoon.

“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent,” the official Federal Reserve press release states.

The cut was expected, with the only question being whether the Fed would cut rates by 25 or 50 basis points. Bitcoin (BTC) continued to trade within the $60,000 range shortly after the announcement. The dominant cryptocurrency fell to just under $53,000 in early September but gradually recaptured $60,000 and has been hovering near that price since last week, according to data from CoinMarketCap.

A majority of analysts had forecasted a 50-basis-point cut, and metrics such as CME FedWatch had assigned a 59% probability to the likelihood of such a cut minutes before the Fed’s official statement was published.

The reduction represents a significant shift in U.S. monetary policy, which had seen the country’s central bank hike rates eleven times between March 2022 and July 2023 in response to runaway inflation and high unemployment in the wake of the Covid pandemic.

Inflation peaked at 9.1% in June 2022 and has since subsided to 2.5% as of August 2024. Meanwhile, unemployment, which skyrocketed to nearly 15% at the height of the pandemic in April 2020 is currently at 4.2%, which while lower than pandemic levels, has been on an upward trajectory since August 2023.

With inflation under control but still outside the Fed’s 2% target and unemployment gradually creeping upwards, the central bank decided to slash rates for the first time since March 2020.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the release states. “Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.”

Analysis

Mike Butler, options trader with financial network Tasty Live, told Unchained that, “While rate cuts can be good for a ‘risk-on’ environment and potential bullish movement, since risk-free rates will be lower, I think the biggest catalyst for a strong bull market in crypto is simply more volatility in fiat currencies.”

“After all, many look to crypto to get out of what we’re witnessing entirely — a governing body working hard to control inflation on a currency,” he added.

Speaking at the Token2049 conference in Singapore on Wednesday before the cuts were announced, BitMex co-founder Arthur Hayes predicted that crypto markets will tumble initially in response to the Fed’s rate cuts.

“I think a lot of people are looking forward to a rate cut, meaning that they think the stock market and other things are going to pop off the jam,” Hayes said .“[However], I think the markets are going to collapse a few days after the rate cut, because this is going to narrow the interest rate differential between the US dollar and the Japanese yen.”

There have been five rate cuts since Bitcoin’s debut in 2009, and the price of BTC price hasn’t consistently trended up or down after each reduction.

Three of the five cuts came in August, September, and October of 2019 – 25 basis points each time. After the August 2019 reduction, bitcoin saw significant gains for roughly a week after the cut but lost much of that price appreciation in the ensuing days. The cryptocurrency was mostly flat shortly after the September and October reductions.

Additional reporting by Sage Young

UPDATE (Sept. 18 3:12 p.m. ET): Updated to add in comments from Arthur Hayes.