Source: Techhive
The Federal Reserve has finally completed its first interest rate cut since March 2020, signaling a shift from a tightening to an easing monetary policy.
On September 18th, the Federal Reserve announced a 50 basis points cut in the federal funds rate target range, bringing it down to a level between 4.75% and 5.00%. Federal Reserve Chairman Jerome Powell referred to the 50 basis points cut as a “forceful action.”
The cryptocurrency market saw a glimmer of hope as Bitcoin experienced increased volatility on September 19th. It surged from a high of $59,000 to over $63,000, marking a 6% daily increase. On September 23rd, it further surpassed $64,600. Ethereum also rose from $2,200 to over $2,400 and broke through the $2,600 mark on September 23rd. The overall market capitalization of the cryptocurrency market increased by 6% in the five days following the rate cut, reaching $2.3 trillion.
After the first rate cut, it is widely anticipated that further rate cuts will take place in the fourth quarter. Apart from emergency rate cuts during times of crisis, a 50 basis points rate cut by the Federal Reserve is uncommon. The last significant rate cut occurred in 2020 when the Federal Reserve implemented an aggressive rate cut policy in response to the impact of the COVID-19 pandemic, bringing interest 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, rate cuts have typically driven an increase in Bitcoin prices. Will the cryptocurrency market repeat history following this rate cut?
The “Boot” of rate cuts lands
Since the second half of this year, Bitcoin has experienced a rollercoaster ride in the cryptocurrency market. After entering a period of continuous low-level fluctuations in August, the focus of the cryptocurrency market has shifted to the Federal Reserve’s interest rate.
A rate cut refers to the Federal Reserve lowering the federal funds rate, which serves as the benchmark interest rate for interbank borrowing in the United States. Lowering the interest rate reduces borrowing costs, making it easier for businesses and individuals to obtain loans, thereby stimulating economic activity, increasing employment, and controlling inflation. Rate cuts reduce the cost of funds, stimulate economic activity and investment, and make investors more inclined to invest in high-risk, high-return assets, including cryptocurrencies like Bitcoin.
From 2008 to 2022, the federal funds rate in the United States remained at an extremely low range of 0-0.25%. There was a mild upward trend starting in 2016, but it never exceeded 2.25%.
During the more than two-year-long fight against inflation in the United States, the Federal Reserve continuously raised the federal funds rate. In the rate hike cycle from March to the end of the year in 2022, there were a total of seven rate hikes, with a cumulative increase of 425 basis points. By December 2022, the Federal Reserve had raised the federal funds rate target range to 4.25%-4.50%, the highest level since the 2008 global financial crisis.
As of September 8th, 2024, the Federal Reserve’s federal funds rate target range was 5.25%-5.50%. From a historical perspective, the current federal funds rate in the United States is at its highest level in over a decade.
The pace of rate hikes finally stopped in September. On September 18th, the Federal Reserve announced a 50 basis points cut in the federal funds rate target range, bringing it down to a level between 4.75% and 5.00%. Federal Reserve Chairman Jerome Powell referred to the 50 basis points cut as a “forceful action.” He emphasized that a significant rate cut does not necessarily indicate an imminent economic recession in the United States but rather serves as a preventive measure to maintain the stability of the economy and labor market.
Federal funds rate dot plot
The dot plot of interest rates shows that the median expectation for the federal funds rate at the end of 2024 among the 19 policymakers falls between 4.25% and 4.5%. This means that overall, they believe there will be an additional 50 basis points rate cut by the end of the year.
ETH outperforms BTC in the rebound
After the rate cut by the Federal Reserve, the three major U.S. stock indexes collectively fell on September 18th, indicating that the rate cut did not meet expectations for boosting the stock market. In contrast, the performance in 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 U.S. ETF asset target sequence since last year and this year, respectively.
Following the news of the rate cut on September 19th, Bitcoin (BTC) surged from a high of $59,000 to over $63,000, marking a 6% daily increase. Ethereum (ETH) also rose from $2,200 to over $2,400 and surged above $2,600 on September 22nd.
However, Ethereum’s overall performance outperformed Bitcoin, with a 7-day increase of 16.3%, significantly higher than Bitcoin’s 7-day increase of 9.7%.
In addition, SOL achieved a gain of over 20% on the day of the rate cut, while meme coin DOGE saw a 3% increase. The oracle token ORDI and the SATS token in the Bitcoin ecosystem also achieved nearly 10% gains.
Alongside the collective increase in cryptocurrency prices, Bitcoin spot ETFs also ended eight consecutive days of net outflows. Since September 12th, Bitcoin spot ETFs have witnessed
