It is said that interest rate cuts are good news: What impact will this round of interest rate cuts have on the crypto market?

Due to the importance of the US economy and the global status of the US dollar, the Fed's policy measures have a profound and direct impact on the global financial market, so its decisions have attracted much attention from the global market.

So what will be the intensity, speed and frequency of the upcoming Fed rate cut cycle? How long will the entire rate cut cycle last? How will it affect the global financial market?

How to view the Fed's current round of rate cuts

1. Expectations for this round of rate cuts

Entering the third quarter of 2024, there are signs in the US domestic market that monetary policy may need to be adjusted. Data such as unemployment rate, employment, and wage growth show that market activity has declined, the decline in technology stocks shows that economic growth has slowed, and the United States still has a huge amount of outstanding debt interest. There are signs that the Fed needs to cut interest rates to boost consumption, revitalize the economy, and over-issue currency. Before Black Monday, the market generally predicted that the Fed might start cutting interest rates as early as September this year.

According to market expectations, Goldman Sachs had previously expected the Fed to cut interest rates by 25 basis points in September, November, and December, and pointed out that if the August employment report was weak, it might cut interest rates by 50 basis points in September. Citigroup also predicted that interest rates might be cut by 50 basis points in September and November. Economists at JPMorgan Chase adjusted their forecasts, believing that the Fed might cut interest rates by 50 basis points in September and November, and mentioned that emergency interest rate cuts might be made between meetings.

After Black Monday, some radical analysts believed that the Fed might take action before the September meeting, with a probability of a 25 basis point cut of 60%, which is extremely rare and is generally used to deal with serious risks. The last emergency interest rate cut occurred at the beginning of the epidemic.

However, the global economic trend, including the US economy, is still very uncertain. Major institutions hold different views on whether this round of interest rate cuts is a preventive or relief-style rate cut. The impact of the two on the market is also very different, and further observation is needed.

2. The possible impact of this round of Fed rate cuts

The Fed's interest rate cut expectations have begun to affect global financial markets and capital flows. In order to respond to the downward pressure on the economy, the interest rate cut bets of the UK and the European Central Bank are also heating up. Previously, some investors believed that the probability of the Bank of England cutting interest rates in September is now more than 50%. For the European Central Bank, traders expect two interest rate cuts by October, and it is not far from the expectation of a sharp interest rate cut in September.

Impact on global markets

First, the reduction in US dollar interest rates may prompt funds to flow to markets and assets with higher yields, leading to an increase in global capital flows.

The interest rate cut may also depreciate the US dollar, which may trigger exchange rate fluctuations and push up the prices of dollar-denominated commodities such as crude oil and gold. In addition, the depreciation of the US dollar may enhance the competitiveness of US exports, but it may also exacerbate international trade tensions.

At the same time, interest rate cuts may reduce the borrowing costs of global stock markets, boost corporate profit expectations, and thus drive stock markets up.

The reduction in international capital costs will encourage more investment, but the impact on countries and companies that are already highly indebted will be limited.

Because although the reduction in international capital costs will encourage investment, highly indebted countries and companies may find it difficult to use these low-cost funds for new investments due to debt pressure and strict borrowing conditions.

Finally, interest rate cuts may bring global inflationary pressures, especially when currencies depreciate and commodity prices rise, which will have an impact on economic stability and central bank policies.

Will interest rate cuts directly benefit the cryptocurrency market?

Although many people believe that interest rate cuts increase market liquidity, reduce borrowing costs, and may push up cryptocurrency prices, in an interest rate cut environment, economic uncertainty increases, and investors may turn to safe-haven assets such as Bitcoin, but they also need to be vigilant about the potential risk of economic recession.

In the case of a complex and changing market environment, the market may also experience significant fluctuations during interest rate cuts. During the 2008 financial crisis, even though the Federal Reserve cut interest rates in the early stages, the market still fell sharply after a brief high. Although the Federal Reserve quickly and significantly reduced interest rates, it failed to effectively curb the spread of the crisis. The roots of this crisis can be traced back to the successive bursts of the dot-com bubble and the real estate bubble, which had a profound recessionary impact on the economy.

Whether the current interest rate cut policy will repeat the same mistakes and trigger an outbreak such as the artificial intelligence bubble or the US debt crisis, which will in turn drag down the crypto market, remains to be seen.

However, in the short term, the interest rate cuts by global central banks represented by the Federal Reserve are a shot in the arm for global financial markets and crypto markets. There is no doubt that the expectation of interest rate cuts will directly promote the increase of market liquidity, trigger market optimism, and is expected to prompt the cryptocurrency market to usher in a wave of rising prices in the short term, bringing investors opportunities for quick profits.

In the long run, the trend of the cryptocurrency market will be affected by more complex and changeable factors, and price fluctuations are not only driven by a single factor, which requires a comprehensive analysis:

First, the market trend mainly depends on the strength of economic recovery. If interest rate cuts can promote economic growth, the cryptocurrency market may benefit; conversely, if the economic recovery is weak and market confidence weakens, cryptocurrencies will inevitably be affected. During the COVID-19 pandemic in 2020, Bitcoin also experienced a 312 crash due to the stock market and commodities. Now the US economy is weaker than the Federal Reserve expected. If the stock market follows the decline of the ISM manufacturing index, the price of Bitcoin may continue to fall. In addition, investors may sell Bitcoin during economic downturns.

Second, inflation factors need to be considered. The central bank cuts interest rates to stimulate the economy and promote consumption, but it may also lead to inflation risks such as rising prices. Then rising inflation will in turn lead to the central bank raising interest rates, which will bring new pressure to the crypto market.

Third, the US election and global regulatory changes also have far-reaching impacts. Who will be the new president? It is still unknown what policy the new president will adopt towards cryptocurrencies.

In short, the prelude to interest rate cuts by global central banks has undoubtedly brought new opportunities and challenges to the cryptocurrency market. Interest rate cuts may provide liquidity support for crypto assets in the short term, which includes factors such as increased liquidity and increased risk aversion, but they also face the lessons of historical financial crises and challenges from other complex factors. It is difficult to guarantee that they will be beneficial to the development of the cryptocurrency market for the time being.

End of the article

Through the cyclical laws of finance in the past, crises and opportunities are born together. Generally, economic downturns, market fluctuations and investment losses may bring about anxiety and panic, and also provide investors and companies with an opportunity to regroup and find innovative opportunities. At the same time, crises force companies to improve their business models and improve efficiency, and thus develop more steadily in the future.

However, what will be the final trend of this round? How long will the negative impact of the crisis last? Can the market really improve after the Fed really cuts interest rates? We still have to look at the current funding situation before we can draw a conclusion.

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