It is said that interest rate cuts are good news: What impact will this round of interest rate cuts have on the crypto market?

Due to the importance of the U.S. economy and the global status of the U.S. dollar, the Federal Reserve's policy measures have a profound and direct impact on global financial markets, so its decisions are closely watched by global markets.

So what will be the intensity, speed and frequency of the upcoming Fed rate cut cycle? How long will the entire rate cut cycle last? How will it affect global financial markets?

How to view the Fed's current round of interest rate cuts

1. Expectations for this round of interest rate cuts

Entering the third quarter of 2024, the US domestic market showed signs that monetary policy may need to be adjusted. Data such as unemployment rate, employment, and wage growth showed that market activity has declined, the decline in technology stocks showed that economic growth has slowed, and the United States still has a huge amount of outstanding debt interest. All signs indicate that the Federal Reserve needs to promote consumption, revitalize the economy, and issue excessive currency through interest rate cuts. Before Black Monday, the market generally predicted that the Federal Reserve might start cutting interest rates as early as September this year.

According to market expectations, Goldman Sachs had previously expected the Fed to cut interest rates by 25 basis points in September, November and December, and pointed out that if the August employment report is weak, a 50 basis point cut in September is possible. Citigroup also predicted that interest rates may be cut by 50 basis points in September and November. Economists at JPMorgan Chase adjusted their forecasts, believing that the Fed may cut interest rates by 50 basis points in September and November, and mentioned that an emergency rate cut may be made between meetings.

After Black Monday, some radical analysts believed that the Fed might take action before the September meeting, with a 60% chance of a 25 basis point rate cut, which is extremely rare and is generally used to deal with serious risks. The last emergency rate cut occurred at the beginning of the epidemic.

However, there is still great uncertainty in the global economic trends, including the US economy. Major institutions have different opinions on whether this round of interest rate cuts is a preventive or relief-style cut. The impact of the two on the market is also very different, and further observation is needed.

2. The possible impact of this round of Fed rate cuts

The Fed's rate cut expectations have begun to have an impact on global financial markets and capital flows. In response to the downward pressure on the economy, the interest rate cut bets of the Bank of England and the European Central Bank are also heating up. Previously, some investors believed that the probability of the Bank of England cutting interest rates in September is now more than 50%. For the European Central Bank, traders expect two rate cuts by October, and the expectation of a sharp rate cut in September is not far away.

Impact on global markets

First, lower US dollar interest rates may prompt funds to flow to markets and assets with higher yields, leading to an increase in global capital flows.

A rate cut could also weaken the dollar, which could trigger exchange rate fluctuations and push up the prices of dollar-denominated commodities such as crude oil and gold. In addition, a weaker dollar could make U.S. exports more competitive, but it could also exacerbate international trade tensions.

At the same time, interest rate cuts may reduce borrowing costs for global stock markets, boost corporate profit expectations, and thus drive stock markets higher.

Lower international capital costs will encourage more investment, but will have limited impact on already highly indebted countries and companies.

Because although lower international capital costs will encourage investment, highly indebted countries and companies may find it difficult to use these low-cost funds for new investments due to debt pressure and strict borrowing conditions.

Finally, interest rate cuts could bring global inflationary pressures, especially when currencies depreciate and commodity prices rise, which would have an impact on economic stability and central bank policies.

Will the interest rate cut directly benefit the cryptocurrency market?

Although many people believe that interest rate cuts will increase market liquidity, reduce borrowing costs, and may push up cryptocurrency prices, and in an environment of interest rate cuts, economic uncertainty will increase, and investors may turn to safe-haven assets such as Bitcoin, they also need to be wary of potential economic recession risks.

In a complex and volatile market environment, the market may also experience significant volatility during interest rate cuts. During the 2008 financial crisis, even though the Federal Reserve took interest rate cuts in the early stages, the market still fell sharply after a brief high. Although the Federal Reserve quickly and significantly lowered interest rates, it failed to effectively curb the spread of the crisis. The roots of the crisis can be traced back to the successive bursting of the dot-com bubble and the real estate bubble, which had a profound recessionary impact on the economy.

It remains to be seen whether the current rate-cutting policy will repeat past mistakes and trigger an outbreak such as the AI ​​bubble or the US debt crisis, which in turn will drag down the crypto market.

However, in the short term, the interest rate cuts by global central banks, represented by the Federal Reserve, are a shot in the arm for the global financial market and the crypto market. There is no doubt that the expectation of interest rate cuts will directly promote the increase of market liquidity, trigger market optimism, and is expected to promote a wave of rising prices in the cryptocurrency market in the short term, bringing investors opportunities for quick profits.

In the long run, the trend of the cryptocurrency market will be affected by more complex and changeable factors, and price fluctuations are not driven by just one factor, which requires a comprehensive analysis:

First, the market trend mainly depends on the strength of economic recovery. If interest rate cuts can promote economic growth, the cryptocurrency market may benefit; conversely, if the economic recovery is weak and market confidence weakens, cryptocurrencies will inevitably be affected. During the 2020 COVID-19 pandemic, Bitcoin also experienced a 312 crash due to the stock market and commodities. The US economy is now weaker than the Federal Reserve expected. If the stock market follows the decline of the ISM manufacturing index, the price of Bitcoin may continue to fall. In addition, investors may sell Bitcoin during economic downturns.

Secondly, we need to consider the inflation factor. The central bank cuts interest rates to stimulate the economy and promote consumption, but it may also lead to inflation risks such as rising prices. Then rising inflation will in turn lead to the central bank raising interest rates, which will bring new pressure to the crypto market.

Third, the US election and global regulatory changes also have far-reaching impacts. Who will be the new president? What policy the new president will adopt towards encryption is still unknown.

In short, the interest rate cuts initiated by central banks around the world have undoubtedly brought new opportunities and challenges to the cryptocurrency market. The interest rate cuts may provide liquidity support for crypto assets in the short term, which includes factors such as increased liquidity and increased risk aversion demand. However, they also face the lessons of historical financial crises and challenges from other complex factors. It is difficult to guarantee that they will be beneficial to the development of the cryptocurrency market for the time being.

End of the article

According to the cyclical laws of finance in the past, crises and opportunities go hand in hand. Generally, economic downturns, market fluctuations and investment losses may bring anxiety and panic, but they also provide investors and companies with opportunities to regroup and find innovative opportunities. At the same time, crises force companies to improve their business models and increase efficiency, thereby developing more steadily in the future.

But how will this round of market trend end? How long will the negative impact of the crisis last? Will the market really improve after the Fed cuts interest rates? We still need to look at the current funding situation before we can draw a conclusion.

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