Author: Hippo Community
The correlation between the Federal Reserve’s interest rate cuts and the crypto market Bitcoin was born in 2008, so we will not refer to the US interest rate cuts before 2008. The most recent interest rate cut was in August 2019. First, let’s review the timeline of the interest rate cuts in 2019.
1.On August 1, 2019, the Federal Reserve announced a 25 basis point interest rate cut, lowering the federal benchmark interest rate to 2%-2.25%. This was the first interest rate cut by the Federal Reserve since the interest rate hike in December 2015;
2.On September 18, 2019, the Federal Reserve announced another 25 basis point interest rate cut, lowering the federal funds rate target range to 1.75%-2%;
3.On October 31, 2019, the Federal Reserve announced a third 25 basis point interest rate cut, lowering the federal funds rate range to 1.50%-1.75%.
Economic background: Although the US economy remained strong in 2019, there were some signs of slowdown, such as weakening manufacturing activity, weak global economic growth, and intensified Sino-US trade tensions. In order to respond to these potential economic downside risks, the Federal Reserve decided to take a preventive rate cut. Rate cut timing: The Fed cut rates three times in August, September and October 2019, each time by 25 basis points, reducing the federal funds rate from 2.25%-2.5% to 1.5%-1.75%.
Stock market rises: The rate cuts in 2019 boosted investor confidence, especially against the backdrop of the Fed's shift to easing policies. The S&P 500 rose nearly 29% in 2019, its best annual performance since 2013. Rate cuts injected more liquidity into the market, reduced borrowing costs for companies, and increased risk appetite in the market. Tech stocks led the gains: The technology sector performed particularly strongly, with the Nasdaq Composite Index rising more than 35% throughout the year. The lower interest rate environment made it easier for technology companies to raise funds and expand their businesses, and investors' interest in growth stocks also increased significantly.
Bond Yields Fall: As the Fed cuts interest rates, bond market yields generally fall. The 10-year Treasury yield fell to around 1.5% in 2019, the lowest in recent years. Bond prices rose, especially for long-term bonds, as investors chased yields, leading to increased demand. Yield Curve Inversion: In August 2019, the U.S. Treasury market experienced a yield curve inversion (short-term bond yields were higher than long-term bond yields), a phenomenon often seen as an early warning sign of a recession. Despite this, the market's overall reaction to the Fed's rate cut was optimistic, believing that the rate cut could delay or avoid a recession.
US dollar exchange rate fluctuations: In 2019, the US dollar index (DXY) fluctuated slightly after the Fed's rate cut, but remained relatively strong overall. This may be because while the Fed is cutting interest rates, other major central banks around the world are also adopting easing policies, offsetting some of the depreciation pressure on the US dollar. Emerging market currencies benefit: Emerging market currencies and assets were generally supported after the Fed cut interest rates as investors flowed into these markets in search of higher returns.
Gold price rises: In 2019, as the Fed cut interest rates and global economic uncertainty increased, gold prices rose by more than 18%, reaching their highest level since 2013. Investors see gold as a hedge against inflation and economic uncertainty.
Lower mortgage rates: The interest rate cuts have led to lower mortgage rates, driving the growth of housing demand. The real estate market performed well in 2019, and house prices continued to rise, especially in the low interest rate environment, with increased home purchases and refinancing activities.
Market Optimism: The Fed's rate cuts signaled support for economic growth and boosted overall market confidence. Investors generally believe that rate cuts will help mitigate the risk of an economic slowdown, thereby boosting the performance of financial markets.
The Fed's rate cuts in 2019 significantly boosted financial markets, especially the stock and bond markets. Despite some economic uncertainties and market volatility, overall, the rate cuts injected more liquidity into the market, boosted investor confidence, and led to stronger asset price performance.
Judging from the Fed's interest rate cut in 2019, the impact of the interest rate cut on the crypto market in the short term does not seem to be particularly large. The increase in Bitcoin on the three days of the announcement of interest rate cuts on August 1, September 18, and October 31 was very limited. I have summarized several reasons: The maturity, market size and influence of the Bitcoin market: Although Bitcoin already had a certain market size in 2019, compared with the traditional financial market, its size is still small and its liquidity is low.
The Fed's rate cut has a more direct and significant impact on large-scale traditional assets (such as stocks and bonds), while the impact on the relatively small Bitcoin market is more indirect. Low institutional participation: Although institutional investors have begun to pay attention to Bitcoin in 2019, its market dominance is still dominated by retail investors. The lack of influence of institutional investors in 2019 has led to a small impact of rate cuts on Bitcoin prices.
Macroeconomic uncertainty, global economic slowdown: In 2019, global economic growth slowed down, especially the uncertainty caused by the Sino-US trade war, and investors' overall risk appetite declined. Despite the Fed's rate cut, the market prefers safe-haven assets such as gold, while Bitcoin is still regarded as a high-risk asset.
Investor wait-and-see sentiment: Due to global economic uncertainty, many investors may have adopted a more cautious attitude and wait and see market trends rather than immediately invest in high-risk assets such as Bitcoin.
Bitcoin market volatility, sentiment and speculation: Bitcoin market price fluctuations are often driven more by sentiment and speculation than by monetary policy as in traditional markets. In 2019, the Bitcoin market experienced some volatility, but did not form a consistent upward trend. Internal events: Cryptocurrency markets are often affected by specific events, such as security issues on exchanges, regulatory policy changes, etc. These internal factors may have suppressed Bitcoin's gains after the rate cut. Market expectations for rate cuts Rate cuts have been digested: In 2019, the Fed's rate cuts were not completely unexpected by the market, but were expected. Therefore, the impact of rate cuts on the Bitcoin market may have been digested in advance, resulting in a muted market reaction after the actual rate cut.
Market focus: Although rate cuts are generally good for risky assets, in 2019, the market's focus was more on economic slowdown and trade wars, which may have weakened the potential positive impact of rate cuts on Bitcoin.
Characteristics of the crypto market, decentralization and independence: As a decentralized digital asset, the price of Bitcoin is affected by many factors around the world, not just the monetary policy of the Federal Reserve. Factors such as regulatory policies, technological development, and social acceptance around the world also affect the price of Bitcoin.
Market education and acceptance: In 2019, although Bitcoin's popularity has increased, its acceptance and understanding as an investment asset have not reached today's level, resulting in investors not generally considering Bitcoin as a hedging tool when facing macroeconomic changes. Competition from other safe-haven assets
The appeal of gold: In 2019, many investors still prefer traditional safe-haven assets such as gold to Bitcoin. Gold performed strongly in 2019, rising by more than 18%, indicating that investors chose gold more than Bitcoin when dealing with economic uncertainty.
Although the Fed's rate cuts in 2019 created a looser monetary environment, Bitcoin did not see a big rise. The reaction of the Bitcoin market is affected by its own unique market structure, global economic uncertainty, and market sentiment and expectations. This shows that Bitcoin's price trend is not only dependent on a single economic policy, but is driven by multiple factors.
I believe that the Fed's rate cut in 2024 will definitely bring a significant wealth effect to the crypto market, because this round of market participation is much higher than the previous round, and the amount of funds in the hands of institutions is large enough. In the interest rate cut environment, investors' risk appetite may rise because the cost of borrowing is lower and the market's optimism is enhanced. At present, other financial markets such as US stocks, gold, real estate and other bulk capital markets are at a relatively high level, so it is very likely to bring funds into the crypto market. The Fed's rate cuts are often accompanied by a depreciation of the US dollar, and Bitcoin is seen by some investors as a tool to hedge against the depreciation of fiat currencies. When the US dollar depreciates, Bitcoin may attract more investors as a means of hedging, thereby pushing up its price.
How will this round of market trend end? How long will the negative impact of the crisis last? Will the market really improve after the Fed cuts interest rates? We still need to look at the current funding situation before we can draw a conclusion.
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