The Federal Reserve has finally completed its first interest rate cut since March 2020, shifting its monetary policy from a tightening cycle to an easing cycle.
On September 18, local time, the Federal Reserve announced a 50-basis-point cut in the federal funds rate target range, lowering it to a level between 4.75% and 5.00%. Fed Chair Jerome Powell described the 50-basis-point cut as a “strong action.”
The cryptocurrency market seemed to welcome the dawn, with Bitcoin experiencing increased volatility on September 19. It surged from a high of $59,000 to above $63,000, a 6% daily increase. On September 23, it further surpassed $64,600. Ethereum also rose above $2,400 and crossed the $2,600 mark on September 23. The overall market capitalization of the cryptocurrency market increased by 6% in the five days following the interest rate cut, reaching $2.3 trillion.
After the first interest rate cut, it is widely expected that there will be further cuts in the fourth quarter. Apart from emergency cuts during the crisis, a 50-basis-point cut by the Federal Reserve is not common. The last significant interest rate cut occurred in 2020 when the Fed implemented an aggressive easing policy in response to the impact of the COVID-19 pandemic, bringing rates close to zero. At that time, the price of Bitcoin did not immediately skyrocket but eventually surpassed the $30,000 mark by the end of the year.
Historically, interest rate cuts have typically driven Bitcoin prices higher. Will the cryptocurrency market repeat history after this interest rate cut?
Interest Rate “Boot” Drops
Since the second half of this year, Bitcoin has been on a roller-coaster ride in the cryptocurrency market, maintaining a low-level oscillation after entering August. The US federal funds rate has become the focus of attention in the cryptocurrency market.
Interest rate cuts refer to the Federal Reserve lowering the federal funds rate, which is the benchmark interest rate for interbank borrowing in the United States. Lowering interest rates means reducing the cost of borrowing, making it easier for businesses and individuals to obtain loans, thus stimulating economic activity, increasing employment, and controlling inflation. Interest rate cuts reduce the cost of capital, stimulate economic activity and investment, and make investors more inclined towards high-risk, high-return assets, including Bitcoin and other cryptocurrencies, in addition to stocks.
From 2008 to 2022, the US federal funds rate remained in the extremely low range of 0-0.25%. It began to rise moderately in 2016 but never exceeded 2.25%.
During the more than two-year fight against inflation in the United States, the Federal Reserve continued to raise the federal funds rate. From March to the end of the year in 2022, there were a total of seven interest rate hikes during the tightening cycle, with a cumulative increase of 425 basis points. By December 2022, the Federal Reserve raised the federal funds rate target range to 4.25%-4.50%, the highest level since the 2008 global financial crisis.
As of September 8, 2024, the Federal Reserve’s federal funds rate target range is 5.25%-5.50%. From a chart perspective, the current US federal funds rate is at its highest level in more than a decade.
The pace of interest rate hikes finally stopped in September. On September 18, the Federal Reserve announced a 50-basis-point cut in the federal funds rate target range, lowering it to a level between 4.75% and 5.00%. Fed Chair Jerome Powell described the 50-basis-point cut as a “strong action.” He emphasized that a significant interest rate cut does not indicate an imminent economic recession but rather is a preventive action to maintain the stability of the economy and labor market.
Interest Rate Dot Plot
The dot plot of interest rates shows that the median expectation of the 19 policymakers for the Federal Reserve rate by the end of 2024 falls between 4.25% and 4.5%. This means that they generally believe there will be an additional 50-basis-point cut by the end of the year on top of the current rate cut.
ETH Rebound Outperforms BTC
After the interest rate cut by the Federal Reserve, the three major US stock indexes collectively fell on September 18, failing to meet expectations of boosting the stock market. In contrast, the performance of the cryptocurrency market was more optimistic, especially for Bitcoin and Ethereum, the two largest assets by market capitalization, both of which have been included in the lineup of US stock ETF assets last year and this year.
Following the news of the interest rate cut on September 19, Bitcoin (BTC) rose from around $59,000 to above $63,000, a 6% increase in a day. Ethereum (ETH) also rose from around $2,200 to above $2,400 and surpassed $2,600 on September 22.
However, Ethereum’s overall performance was better than Bitcoin, with a 7-day increase of 16.3%, much higher than Bitcoin’s 7-day increase of 9.7%.
In addition, SOL saw an increase of over 20% on the day of the interest rate cut, while meme coin DOGE saw a 3% increase. The native tokens of the Bitcoin ecosystem, ORDI, and SATS, also achieved nearly 10% increases.
While cryptocurrency prices rose collectively, Bitcoin spot ETFs saw a net inflow after eight consecutive days of outflows. Since September 12, Bitcoin spot ETFs have seen net inflows for four consecutive days, indicating a gradual recovery in investor confidence in off-exchange funds.
Many market professionals have a positive outlook on the interest rate cut by the Federal Reserve, believing that