Boots on the ground! The Federal Reserve cuts interest rates, is a Bitcoin bull market about to begin?

Author: Arain, ChainCatcher
The boots have finally dropped. In the early hours of September 19, Beijing time, the Federal Reserve Committee announced a 50 basis point reduction in the target range for the federal funds rate, lowering it to between 4.75% and 5.00%. This marks the first interest rate cut by the Federal Reserve since March 2020, following 11 consecutive rate hikes from March 2022 to July 2023, totaling an increase of 525 basis points to alleviate domestic inflation in the U.S.

This means that U.S. monetary policy has shifted from tightening to easing, allowing Bitcoin to temporarily escape its sluggish state and rebound before the interest rate cut decision, returning to $60,000 per coin, and subsequently surging to a nearly 20-day high. Today, in pre-market trading, cryptocurrency-related stocks rose, with Coinbase (COIN.US) up over 3% and MicroStrategy (MSTR.US) up over 4%.

Rare Rate Cut, Market Reaction Chaotic

Historically, significant rate cuts by the Federal Reserve often lead to economic growth, stimulate inflation, and create asset bubbles.

The recent announcement of a 50 basis point rate cut by the Federal Reserve is a historically rare adjustment. Bank of America had previously warned that a 50 basis point cut "makes no sense, is hard to communicate, and could trigger a flight to safety."

There have only been three instances in history where the U.S. has cut rates without an economic recession: during the Greenspan era from 1994 to 1996, during the Asian financial crisis from 1998 to 1999, and during the liquidity crisis in 2019, with each of these rate cut cycles consisting of three cuts of 25 basis points. Some market analysts believe this rate cut may compensate for the one in July and reflects the Federal Reserve's lagging actions, but Fed Chairman Powell denied that the Fed's rate cuts have been delayed, asserting that this action is precisely a "commitment not to lag behind economic conditions."

Nomura Securities stated that it studied the performance of assets during several historical significant rate cut cycles, noting that three months after a 50 basis point cut by the Federal Reserve, the S&P 500 index showed little change, while small-cap stocks surged, technology stocks performed well, value stocks outperformed growth stocks, the dollar rose, metal prices soared, and the yield curve steepened in a bull market trend.

J.P. Morgan expects the Federal Reserve to continue cutting rates, pointing out that the beginning of the Fed's easing cycle often coincides with poor performance in risk assets.

On the day the rate cut information was announced, U.S. stocks hit new highs but ultimately closed lower. The Dow Jones Industrial Average fell by 0.25%, the S&P 500 index fell by 0.29%, and the Nasdaq Composite index fell by 0.31%.

Currently, the performance of the cryptocurrency market benefits from the Federal Reserve's rate cut measures. Tradingview data shows that Bitcoin's technical indicators are in a buy state, with moving averages indicating a strong buy signal.

21Shares research analyst Leena ElDeeb stated, "Retail sales exceeded expectations, which was welcomed by the market and temporarily alleviated concerns about an economic recession. We may see a renewed interest from investors in risk assets like cryptocurrencies, stimulating more funds to flow into Bitcoin spot ETFs."

CryptoQuant founder Ki Young Ju X noted that institutions are no longer aggressively shorting Bitcoin. CME futures net positions have decreased by 75% over the past five months.

On the latest X, on-chain analyst @Willy Woo expressed that the bullish trend remains in the short term but "may only have about a week left": "We see a large amount of spot BTC being bought up, and the inventory of exchange derivatives remains stable, but if a short squeeze occurs, this situation could change rapidly. A bullish flag pattern is forming. Current demand and supply are neutrally bearish, but if some liquidations occur, there are signs that we could enter a bullish structure. Cautiously optimistic."

Glassnode's latest report states that based on on-chain data, the Bitcoin market is currently in a balanced state, with investors primarily holding, but future market volatility may increase: "The supply side is tightening, and the number of available stablecoins has significantly decreased. However, the rise in stablecoin supply brings greater future purchasing power, creating tension between current inactivity and potential future demand. This generates a spiral spring effect in the market, suggesting that future volatility will further intensify."

It is important to note that institutions' interpretations of the rate cut information should continue to monitor the subsequent net inflows into ETFs. According to SoSoValue data, on September 18, the U.S. spot Bitcoin ETF reported a net outflow of $52.83 million, ending a streak of four consecutive days of net inflows exceeding $500 million, with outflows led by Ark Invest and 21Shares' ARKB, totaling $42.41 million.

Focus on Future Rate Cut Pace and U.S. Elections

The Federal Reserve may continue to cut rates.

The 19 members of the Federal Open Market Committee expect the Federal Reserve to further cut rates before the end of this year, with 9 anticipating a 50 basis point cut and 7 expecting a 25 basis point cut.

Several institutions have expressed the view that the Federal Reserve will continue to cut rates. Fitch Ratings Chief Economist Brian Coulton stated that this easing cycle will last for 25 months with 10 rate cuts, totaling a reduction of 250 basis points; J.P. Morgan and Citigroup expect the FOMC to cut rates by 50 basis points at the November meeting, with J.P. Morgan believing that subsequent meetings will each see a 25 basis point cut; Bank of America Global Research expects the Federal Reserve to implement a 75 basis point cut in the fourth quarter of this year.

The magnitude of the recent Federal Reserve rate cut has been a hot topic, as it is accompanied by discussions about "whether the U.S. economy is in trouble."

Biden stated on social media X, "We have just reached an important moment: inflation and interest rates are declining, while the economy remains strong… Our policies are lowering (consumer) costs and creating jobs."

U.S. Vice President Harris also remarked that the rate cut is welcome news, stating, "While the (rate cut) announcement is good news for Americans facing high price shocks, my focus is on continuing to lower prices."

Former U.S. President Trump questioned the Federal Reserve's rate cut. When asked about his reaction to the rate cut during a campaign event in New York on the 18th, he responded that it either reflects "a very bad economy": "I think if they are not just playing politics, cutting rates this much indicates the economy is very bad. It’s either a very bad economy or they are playing politics, and those are the only two possibilities. But this is a significant rate cut."

Powell stated at the press conference that there are currently no signs indicating a high likelihood of a downturn in the U.S. economy.

Emmanuel Khor, an executive director at Barclays Capital Securities, believes that after the first rate cut, economic growth rebound may take two to three quarters, so it cannot be determined whether the U.S. economy can avoid recession.

It is noteworthy that the phenomenon of "U.S. economic recession" will also affect the subsequent price trends of Bitcoin. Grayscale expects that if the U.S. economy avoids recession and maintains a controllable slowdown path, Bitcoin may retest its previous historical highs.