Interest Rate Cuts Incoming! Can Cryptocurrencies Rise Amidst the Financial Storm?

On September 19, 2024, the Federal Reserve lowered interest rates by 50 basis points (bps), bringing the federal funds rate to a range of 4.75% to 5%. Interest rate cuts are an important tool used by the Fed to stimulate the economy during periods of slowdown or recession. Let’s take a look at what impact the rate cut will have on cryptocurrencies in the next phase, according to WOO X Research.

 

The Fed's interest rate cut signifies a reduction in the benchmark rate, which typically has a series of significant effects on the economy. For example, lower borrowing costs can encourage businesses and consumers to take on more loans, thus stimulating investment and consumption; the rate cut can also help drive economic growth as easier access to credit can enhance market demand. Furthermore, rate cuts might affect inflation, driving prices up due to increased demand. At the same time, rate cuts usually lead to higher asset prices, such as stocks and real estate, as investors seek better returns. Additionally, interest rate cuts may lead to currency depreciation, as investors turn to higher-yielding currency assets. Overall, the current 50 basis point (bps) cut reflects the Fed's concerns about the state of the U.S. economy, which may already show signs of recession. For the cryptocurrency market, this rate cut is one of the most closely watched positive signals since Bitcoin's halving, as lower interest rates may make investors more willing to engage in other asset investments.

 

Background (Historical Trends Before and After Rate Cuts)

 

Looking at various economic indicators, the current economic situation shows several downward risks that necessitate a rate cut to stimulate growth. The current manufacturing PMI stands at 47.9, indicating contraction and weak manufacturing activity; while the services PMI is at 55.7, it has declined compared to historical averages. Additionally, the current unemployment rate is at 4.2%, and the CPI and PCE year-on-year rates are 2.5% and 2.6%, respectively, both below historical averages, indicating weak demand. Of particular concern is the -0.2 spread between 10-year and 1-year U.S. Treasury credit, which typically signals a recession, while the financial conditions index is -0.56, indicating tightening financial conditions that may further suppress economic activity. Against this backdrop of data, the Fed announced a 50 basis point (bps) rate cut. Lower rates encourage investors to allocate funds to higher-yielding investment activities, which can boost investment markets; however, a large influx of funds into the market will inevitably face the risks of inflation and potential instability in the economic system.

 

Data Trends

 

In the context of rate cuts, combating the potential inflation caused by these cuts is a matter that needs serious consideration. Historically, people often chose gold as a hard currency to combat inflation. However, as the cryptocurrency market has entered the view of an increasing number of investors, Bitcoin, referred to as "digital gold," is attracting more attention, especially after the approval of Bitcoin spot ETFs, which provide a more reassuring investment avenue for investors. Comparing the price trends of BTC (digital gold) with those of gold (traditional safe-haven asset), a strong correlation can be observed between the two, with BTC price changes generally lagging behind gold price trends by about 2 to 5 months. Gold and major stock indices (such as the S&P 500 and Nasdaq 100) generally exhibit a negative correlation, meaning gold serves as a hedge during economic turbulence. In the past six months, Bitcoin has shown a similar safe-haven trend, indicating a weak correlation and inverse relationship with mainstream stock market indicators. Furthermore, Bitcoin can offer higher returns for investors seeking to hedge against risks, given the similar safe-haven attributes.

 

Possible Future Trends?

 

The U.S. is the world's largest and most developed economy, and the Fed's decision to cut rates is not only a U.S. economic policy but also serves as a reference for other countries. The 50 basis point (bps) cut reflects a less than optimistic outlook for the current economic situation. The previous data indicated that gold had considerable volatility before the rate cut. After the announcement of the rate cut, BTC and other cryptocurrencies may see corrections; however, if there are insufficient positive factors moving forward, the market could easily become unsettled due to concerns about economic recession.

 

This article is sourced from Foresightnews:

https://foresightnews.pro/article/detail/68651

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AIC Team

2024/10/7