The Federal Reserve's major shift has begun, and market volatility has intensified

Author: BitpushNews

On Wednesday afternoon local time, Federal Reserve Chairman Jerome Powell announced a 50 basis point cut in the benchmark interest rate to a range of 4.75% - 5.0%, marking the beginning of a monetary easing cycle in the United States.

In addition to announcing the first rate cut in over four years, the latest FOMC forecast indicates that the Fed will cut rates two more times in 2024, with a majority of officials expecting a total cut of 100 basis points this year. Rates are expected to decline further in 2025, with an anticipated value of 3.4%, and long-term rates are projected to bottom out at 2.9%. This typically helps stimulate the market, as traders tend to allocate risk assets in anticipation of a return to loose monetary policy.

Bitcoin data shows that Bitcoin quickly surged and then retraced, soaring from a support level of $60,000 to an intraday high of $61,357, before returning to the support level near $60,000. As of the time of writing, Bitcoin is trading at $60,231, with a 24-hour volatility of less than 1%.

The altcoin market reacted variably, with ZetaChain leading the top 200 tokens, rising by 20.6%, followed by Saga (SAGA) and Nervos Network (CKB), which increased by 13.7% and 11%, respectively. KuCoin Token (KCS) led the decline, falling by 6.1%, while OriginTrail (TRAC) dropped by 5%, and Echelon Prime (PRIME) decreased by 4.3%.

The overall cryptocurrency market capitalization is currently $2.09 trillion, with Bitcoin's market share at 57.2%.

In traditional markets, U.S. stocks surged significantly after the rate cut announcement but then retreated. By the close, the S&P, Dow Jones, and Nasdaq indices all fell, down 0.29%, 0.25%, and 0.31%, respectively. Spot gold briefly broke above $2,600 per ounce during Powell's press conference but later retraced, trading at $2,557.30 per ounce at the time of writing, down 0.46% for the day.

Expected Volatility to Intensify

LMAX Group market strategist Joel Kruger stated in a report: "The Fed met market demands with a larger-than-expected 50 basis point cut. Now that the market has priced in such a degree of easing, the next concern will be whether the market can remain optimistic about risk assets under future Fed easing policies."

From a technical perspective, analysts at Secure Digital Markets noted that BTC's attempt to break through $61,000 on Tuesday failed, leading to a price drop after Wall Street closed. The daily chart shows a clear bearish rejection at the 100-day moving average, with a continued low trend over the past month.

Arthur Hayes, co-founder of BitMEX and Chief Investment Officer of Maelstrom, also warned about the outlook for asset prices following the first rate cut during a keynote speech at Token2049, stating that it could trigger a significant drop in risk assets.

He said: "I believe the Fed's rate cut is a huge mistake because the U.S. government is printing and spending the most money in peacetime. While I think many people are anticipating a rate cut, which means they believe the stock market and other things will exacerbate chaos, I think the market will collapse a few days after the Fed cuts rates."

Although historically, liquidity easing cycles have been favorable for BTC, Hayes warned that this move could exacerbate inflationary pressures and strengthen the Japanese yen (JPY), leading to widespread risk aversion. He stated: "Cutting rates now is a mistake because inflation remains a long-term issue in the U.S., primarily driven by government spending. Cheaper borrowing will only fuel inflation."

He also mentioned that potential rate cuts could lead to market declines as this would "narrow the interest rate differential between the dollar and the yen" (previously, in early August, a wave of liquidations in yen-based arbitrage trades triggered a crash, with BTC briefly falling below $50,000).

Eamonn Gashier, founder and CEO of Block Scholes, also warned about the impact of the newly announced rate cut on the market and yen arbitrage trades.

Gashier stated in a report: "The 50 basis point cut indicates that the Fed is more concerned about the deterioration of the labor market than a second inflation event. This further rate cut will weaken the dollar and may lead to a slight rise in the yen/USD. While people expect the Bank of Japan to pause rate hikes, a weaker dollar could lead to a retraction of yen arbitrage trades, potentially impacting risk assets."

He pointed out: "Given the correlation between Bitcoin and the U.S. stock market since the launch of the Bitcoin ETF, the performance of the S&P 500 during past easing cycles can serve as a useful indicator for what to expect next. Historically, recession cycles triggered by a 50 basis point cut have begun against a backdrop of widespread concern about macroeconomic weakness, leading to prolonged underperformance of risk assets. However, this rate cut may be different and can be seen as the Fed taking additional measures to strengthen the labor market."

The 50 basis point rate cut has provided a short-term boost to the market, but expectations for the future economic outlook in the U.S. are highly divided, with some investors optimistic about a soft landing while others remain cautious about inflation and geopolitical risks. Therefore, in the short term, market trends may become more complex and volatile.