Bitcoin and the crypto market remained under pressure on Monday, with Bitcoin falling below $90,000 and other altcoins being in a bear market after falling by over 20% from their year-to-date high. So, will the Federal Reserve interest rate cut help to stimulate a crypto rally this week?
Federal Reserve to Cut Interest Rates This Week
The main crypto news this week will be the upcoming Federal Reserve interest rate decision, which will happen on Wednesday.
Economists and Polymarket traders believe that the bank will cut interest rates by 0.25% in its third consecutive meeting. These odds have jumped to 93% on both Polymarket and Kalshi.
In theory, a Fed cut coming after the bank ended its quantitative tightening (QT) policy, should be a highly bullish catalyst for cryptocurrencies and stocks.
This view is supported by the fact that Donald Trump has hinted that he will nominate Kevin Hassett to become the next Federal Reserve Chair. Hassett works at the White House, and unlike Powell, he is viewed as a Trump puppet, who will lean towards interest rate cuts.
The Fed will cut interest rates to support the labor market, which has shown some weakness in the past few months. A report released by ADP showed that the economy lost over 30,000 jobs last month.
Officials supportive of cuts also argue that Donald Trump’s tariffs have not fuelled inflation significantly in the past few months, with the headline Consumer Price Index (CPI) remaining at around 3% in the past few months.
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Will the Fed Cut Lead to a Crypto Rally?
In theory, a Federal Reserve interest rate cut and the end of quantitative tightening should be highly bullish for the crypto market. Besides, history shows that crypto prices rise when the Fed is cutting rates and fall when it is tightening.
However, there are reasons why this week’s rate cut may not lead to higher prices. First, the crypto market crash has happened recently despite the two rate cuts by the Fed.
Second, the rate cut, if it happens, has already been priced in by market participants since odds have jumped to 93%. As such, there is a likelihood that crypto prices will retreat once the Fed cuts happen. This is known as buying the rumors, and selling the news.
Third, there is a possibility that a Fed cut will drive up inflation, a move that will put pressure on the bank to back off from more cuts. This explains why US bond yields have drifted upwards in the past few weeks, with the 10-year rising from 3.962% earlier this month to the current 4.14%.
The 30-year yield, which are determined by the market, has soared to 4.80%. Soaring bond yields often lead to more weakness among risk assets.
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