Correlation between Fed rate cuts and crypto markets

The correlation between the Fed’s interest rate cuts and the crypto market Bitcoin was born in 2008, so we will not refer to the US interest rate cuts before 2008. The most recent interest rate cut was in August 2019. First, let’s review the timeline of the interest rate cuts in 2019.

1. On August 1, 2019, the Federal Reserve announced a 25 basis point interest rate cut, lowering the federal benchmark interest rate to 2%-2.25%. This is the first interest rate cut by the Federal Reserve since it raised interest rates in December 2015;

2. On September 18, 2019, the Federal Reserve announced another 25 basis point interest rate cut, lowering the federal funds rate target range to 1.75%-2%;

3. On October 31, 2019, the Federal Reserve announced a third interest rate cut of 25 basis points, lowering the federal funds rate range to 1.50%-1.75%.

How did the market react to the Fed’s rate cut in 2019?

Background of the Fed’s rate cut

Economic background: Although the US economy remained strong in 2019, there were some signs of slowdown, such as weakening manufacturing activity, weak global economic growth, and intensified trade tensions between China and the United States. In order to cope with these potential economic downside risks, the Federal Reserve decided to take preventive interest rate cuts. Rate cut time: The Federal Reserve cut interest rates three times in August, September and October 2019, each time by 25 basis points, reducing the federal funds rate from 2.25%-2.5% to 1.5%-1.75%.

Stock market reaction

Stock Market Rise: Rate cuts in 2019 boosted investor confidence, especially as the Federal Reserve shifted to an accommodative policy. The S&P 500 rose nearly 29% in 2019, its best annual performance since 2013. Rate cuts injected more liquidity into the market, lowered borrowing costs for companies, and increased risk appetite in the market. Technology stocks led the gains: The technology sector performed particularly strongly, with the Nasdaq Composite Index rising more than 35% for the year. The lower interest rate environment made it easier for technology companies to raise funds and expand their businesses, and investors' interest in growth stocks also increased significantly.

Bond market reaction

Bond yields fall: As the Fed cuts interest rates, yields in the bond market generally fall. The 10-year Treasury yield fell to around 1.5% in 2019, the lowest in recent years. Bond prices rose, especially for long-term bonds, as investors chased yields, leading to increased demand. Yield curve inversion: In August 2019, the U.S. Treasury market experienced an inverted yield curve (short-term bond yields are higher than long-term bond yields), a phenomenon that is often seen as an early warning sign of a recession. Despite this, the market's overall response to the Fed's rate cuts was optimistic, believing that rate cuts could delay or avoid a recession.

Foreign exchange market reaction

USD exchange rate fluctuations: In 2019, the US dollar index (DXY) fluctuated slightly after the Fed's rate cut, but remained relatively strong overall. This may be because although the Fed is cutting interest rates, other major central banks around the world are also adopting loose policies, offsetting some of the depreciation pressure on the US dollar. Emerging market currencies benefit: Emerging market currencies and assets are generally supported after the Fed's rate cut as investors flow into these markets in search of higher returns.

Gold market reaction

Gold prices rise: In 2019, gold prices rose by more than 18% to their highest level since 2013 as the Federal Reserve cut interest rates and global economic uncertainty increased. Investors view gold as a hedge against inflation and economic uncertainty.

Real estate market reaction

Lower mortgage rates: Interest rate cuts have led to lower mortgage rates, driving up housing demand. The real estate market performed well in 2019, with house prices continuing to rise, especially in a low interest rate environment, with increased home purchases and refinancing activities.

Overall market sentiment

Market optimism: The Fed's rate cuts signaled support for economic growth and boosted overall market confidence. Investors generally believe that rate cuts will help mitigate the risk of an economic slowdown, thereby boosting the performance of financial markets.

The Fed's interest rate cuts in 2019 significantly boosted financial markets, especially the stock and bond markets. Despite some economic uncertainties and market volatility, overall, the interest rate cuts injected more liquidity into the market, boosted investor confidence, and led to stronger asset price performance.

Judging from the Fed’s interest rate cuts in 2019, the impact of interest rate cuts on the crypto market in the short term does not seem to be particularly large. The increase in Bitcoin on the three days of the announcement of interest rate cuts on August 1, September 18, and October 31 was very limited. I have summarized several reasons:

1. Maturity, market size and influence of the Bitcoin market: Although Bitcoin has achieved a certain market size in 2019, its volume is still small and its liquidity is low compared with traditional financial markets.

2. The Fed's rate cut has a more direct and significant impact on large-scale traditional assets (such as stocks and bonds), while the impact on the relatively small Bitcoin market is more indirect. Low institutional participation: Although institutional investors have begun to pay attention to Bitcoin in 2019, its market dominance is still dominated by retail investors. Institutional investors' lack of influence in 2019 has led to a small impact of rate cuts on Bitcoin prices.

3. Macroeconomic uncertainty, global economic slowdown: In 2019, global economic growth slowed down, especially due to the increased uncertainty caused by the Sino-US trade war, and investors' overall risk appetite declined. Despite the Fed's interest rate cuts, the market prefers safe-haven assets such as gold, while Bitcoin is still regarded as a high-risk asset.

4. Investor wait-and-see sentiment: Due to global economic uncertainty, many investors may have adopted a more cautious attitude and wait-and-see market trends rather than immediately investing funds in high-risk assets such as Bitcoin.

5. Volatility, sentiment, and speculation in the Bitcoin market: Price fluctuations in the Bitcoin market are often driven more by sentiment and speculation than by monetary policy as in traditional markets. In 2019, the Bitcoin market experienced some volatility, but did not form a consistent upward trend. Internal events: Cryptocurrency markets are often affected by specific events, such as security issues on exchanges, regulatory policy changes, etc. These internal factors may have suppressed Bitcoin's gains after the rate cut. Market expectations of rate cuts have been digested: In 2019, the Fed's rate cut was not completely unexpected by the market, but was expected. Therefore, the impact of the rate cut on the Bitcoin market may have been digested in advance, resulting in a muted market reaction after the actual rate cut.

6. Market Focus: While rate cuts are generally good for riskier assets, in 2019, the market’s focus has been more on economic slowdown and trade wars, which may have weakened the potential positive impact of rate cuts on Bitcoin.

7. Characteristics of the crypto market, decentralization and independence: As a decentralized digital asset, the price of Bitcoin is affected by many global factors, not just the Federal Reserve’s monetary policy. Global regulatory policies, technological development, and social acceptance also affect the price of Bitcoin.

8. Market education and acceptance: In 2019, although Bitcoin’s popularity has increased, its acceptance and understanding as an investment asset have not yet reached the current level, resulting in investors not generally considering Bitcoin as a hedging tool when facing macroeconomic changes. Competition from other safe-haven assets

9. Gold’s Appeal: Many investors still prefer traditional safe-haven assets like gold over Bitcoin in 2019. Gold’s strong performance in 2019, up more than 18%, suggests that investors are choosing gold over Bitcoin in response to economic uncertainty.

   Although the Fed's rate cuts in 2019 created a looser monetary environment, Bitcoin did not see a big rally. The Bitcoin market's reaction is influenced by its own unique market structure, global economic uncertainty, and market sentiment and expectations. This shows that Bitcoin's price movement is not dependent on a single economic policy, but is driven by multiple factors.

   I believe that the Fed's interest rate cut in 2024 will definitely bring a significant wealth effect to the crypto market, because the participation of institutions in this round of market is much higher than that in the previous round, and the amount of funds in the hands of institutions is large enough. In the environment of interest rate cuts, investors' risk appetite may rise, because the cost of borrowing is lower, the market's optimism is enhanced, and other financial markets such as US stocks, gold, real estate and other major capital markets are at a relatively high level, so it is very likely to bring funds into the crypto market. The Fed's interest rate cuts are often accompanied by a depreciation of the US dollar, and Bitcoin is seen by some investors as a tool to hedge against the depreciation of fiat currencies. When the US dollar depreciates, Bitcoin may attract more investors as a means of preserving value, thereby pushing up its price.