The U.S. Federal Reserve made its first interest rate cut in four years, lowering the benchmark rate by 50 basis points to a range of 4.75% to 5%. This shift in monetary policy follows the Central Bank’s aggressive rate hikes to curb inflation. Fed officials expect the benchmark rate to fall further, with projections suggesting it will drop to 4.4% by the end of the year, signalling additional rate cuts ahead.
In its statement, the Federal Reserve expressed increased confidence that inflation is moving toward its 2% target, although it remains cautious due to economic uncertainties. Chair Jerome Powell reiterated that while the economy is strong—citing low unemployment—there is still no declaration of victory over inflation. He emphasized that future cuts will depend on incoming economic data, cautioning that further 50-basis-point reductions should not be assumed.
Market Reaction
The markets quickly responded to the Fed’s announcement. Bitcoin, which initially surged after the rate cut, has now jumped to $63K, demonstrating a strong rally. U.S. stocks, however, saw a mixed reaction, with the Nasdaq 100 and the S&P 500 reversing earlier gains to close down 0.3%. Gold followed a similar pattern, climbing to a record high of $2,600 before retreating into negative territory. Meanwhile, the U.S. dollar index (DXY) dropped to 100.3, its lowest point since July 2023, before recovering slightly to 101.
Cryptocurrency-related stocks also struggled to maintain their momentum. MicroStrategy’s shares rose by 1.5%, while crypto exchange Coinbase and investment firm Galaxy Digital posted flat or negative results. Similarly, Bitcoin miners like Marathon Digital and Riot Platforms saw little movement.
Analysts’ Outlook
Joel Kruger, a market strategist at LMAX Group, noted that while the Fed’s rate cut was welcomed, the market’s appetite for risk assets might face challenges in the future. He warned that, with the rate cut already priced in, further gains could be limited unless more accommodating Fed policies are introduced.
David Lawant of FalconX highlighted that the correlation between cryptocurrencies and broader risk assets has reached its highest level in 18 months. He emphasized that macroeconomic conditions are becoming increasingly important for Bitcoin and other digital assets, especially during significant policy shifts.
Arthur Hayes, co-founder of BitMEX, cautioned that the rate cuts could lead to broader market volatility, particularly due to narrowing borrowing rate differentials between the U.S. dollar and the Japanese yen. This could prompt investors to unwind yen-based carry trades, which may trigger sell-offs in both stocks and digital assets. Hayes recalled that a similar dynamic caused a temporary crash in Bitcoin in August, pushing it below $50,000.
Looking Ahead
With Bitcoin now trading at $63K, traders are bracing for potential volatility as the market digests the Fed’s decision. While further rate cuts are likely, their impact on risk assets, including cryptocurrencies, remains uncertain. Analysts suggest that the Fed’s data-driven approach will keep markets on edge, with inflationary trends and economic performance likely determining future policy moves.