Big news from the FOMC meeting this week - after four years, the US Fed has reduced interest rates by 50 basis points. And so, do we start planning for another bull run in the next 4-6 months? 

Let us first understand what the Fed intends to do and how the markets reacted previously to such rate cuts.

The US Fed has made encouraging statements

Fed chairman Jerome Powell has said that the US economy is strong, which is a good sign after facing some uncertainty for a while. The 50 basis points rate cut shows the Fed believes the economy is recovering well. Powell also mentioned that any future rate cuts will be decided as needed, but there’s a good chance we’ll see another cut or two before the end of the year. With elections coming up, there might be another rate cut, as governments often try to keep markets stable during election periods.

How did this impact Bitcoin?

Bitcoin's price has been a bit of a roller coaster since the Fed announced its interest rate cut. Initially, Bitcoin jumped from around $59,500 to $61,000 as investors reacted with optimism. 

This shift in sentiment has helped Bitcoin climb closer to $63,500 today. The big question now is whether Bitcoin can break past a critical level – its 200-day moving average, which is currently around $63,980. If Bitcoin can end the week above this marker, it could signal a surge in momentum, potentially even putting its all-time high price back within reach.

As for altcoins, they have lagged Bitcoin overall with a few exceptions like Solana and Avalanche.

But, what does history tell us?

A 50 basis point rate cut has only happened twice before in the US - once during the dot-com bubble and again during the 2007-2008 financial crisis. 
But caution – on both occasions, the market experienced significant downturns afterwards.

• Dot-com bubble: A similar rate cut was made, which eventually led to market turmoil.
• 2007-08 financial crisis: Another rate cut after 50bps was followed by a market crash.

Source: https://talkmarkets.com/content/this-day-in-stock-market-history-september-18-2007

While this might sound worrying, we should keep in mind the impact of the upcoming elections. Historically, markets can be unpredictable in the short term after such cuts, but long-term recovery is still strong.

Relation between interest rates and Bitcoin

Interest rate adjustments are a key tool used by the Fed to influence economic activity. When the Fed lowers interest rates, it aims to stimulate economic expansion by reducing borrowing costs and incentivizing spending by individuals and businesses. Conversely, raising interest rates serves as a measure to curb inflation by making credit more expensive, potentially slowing down economic activity.

Historically, interest rate cuts have been perceived as a bullish signal for Bitcoin. This correlation stems from the tendency of monetary easing policies, like rate cuts, to weaken the US dollar. A weaker dollar often prompts investors to seek alternative assets, including digital assets like Bitcoin, as a hedge against potential inflation and dollar devaluation. This shift in capital flows can contribute to an increase in demand for Bitcoin, potentially driving up its price.

Source: https://twitter.com/CoinGapeMedia/status/1836600297382383858

Can we expect more cuts in future?

The Fed's "dot plot" is like a sneak peek into the minds of the U.S. central bankers. Updated every quarter, this chart reveals what each official predicts for the future of interest rates. More specifically, it shows where they think the federal funds rate – the key interest rate that influences borrowing costs across the economy – should be by the end of each year.

Source: https://www.reuters.com/markets/currencies/dollar-rebounds-after-fed-goes-big-rate-cut-2024-09-19/

Latest read is:
• By end of 2024: The Fed aims to raise the benchmark interest rate to around 4.4%. This translates to a target range of 4.25% to 4.5%, meaning two more potential rate hikes are on the horizon before the year ends.
• Looking ahead to 2025: The Fed anticipates a more relaxed approach, with a projected interest rate cut of 1%, bringing the rate down to 3.4%.
• And by 2026: The forecast suggests another rate reduction of 0.5%, leading to a final interest rate of 2.9%.

The dot plot signals the Fed's intention to combat inflation with continued rate hikes in the near term, followed by a gradual easing of interest rates in the coming years.

Also, are we nearing the end of re-accumulation range?

Bitcoin has historically broken out from its re-accumulation range 150-160 days after the Halvings, following which the asset has performed exceptionally well.
Currently, we are on day 159, following the halving.

Source: https://twitter.com/rektcapital/status/1836684536433795520

Key takeaways

The recent 0.5% interest rate cut by the Fed has left Bitcoin in a peculiar position. Typically, rate cuts are seen as a positive sign for Bitcoin. Lower rates often lead to inflation, driving investors towards assets like Bitcoin, which are considered hedges against inflation and reliable stores of value. 

However, this rate cut doesn't quite fit the usual pattern. We also have the election season this year. It seems less focused on stimulating the economy and more about urgently addressing increasing economic instability. This has sparked concern among investors. If this rate cut is interpreted as a signal of a deeper economic downturn in the US, investors might shy away from riskier assets, including Bitcoin. 

Although we are currently witnessing a positive momentum, their "risk-off" sentiment could initiate a sell-off, driving Bitcoin's price downward eventually in a week. Adding to the uncertainty is Bitcoin's recent performance. It has already been experiencing volatility, struggling to maintain its upward momentum from the summer. This latest rate cut injects another layer of complexity, potentially leading to further price swings in the coming weeks as investors grapple with deciphering the economic signals. 

In essence, this rate cut presents a gamble for Bitcoin. It could potentially boost its price if interpreted as inflationary. Conversely, it could also backfire and trigger a price drop if it fuels fears of a weakening economy. The true outcome remains to be seen.

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