What does it mean for cryptocurrencies as central banks start lowering interest rates?

Rate cuts are coming! After two difficult years of raising interest rates to fight inflation, central banks around the world are finally starting to cut rates! How will this development affect your portfolio in the coming months?

The Bank of Canada (BOC) lowered its overnight interest rate target by 0.25% to 4.75%, the first rate cut in four years and the first time that G7 countries have adopted loose monetary policy in the post-epidemic era.

While Canada's consumer price index (CPI) in April was slightly above the bank's long-term target of 2%, the Bank of Canada cited "persistent evidence that underlying inflation is easing" to justify its first round of rate cuts.

Despite widespread uncertainty about when the Fed will cut rates, with Barron’s going so far as to boldly claim over the weekend that there will be no rate cuts in 2024, a Bank of Canada rate cut is the base case scenario for this meeting: swap markets have priced in an 80% chance of a rate cut occurring.

Tomorrow, the European Central Bank (ECB) will announce its interest rate target for the coming month, and market participants are almost unanimous in their view that they will cut rates, with a 96% certainty that the ECB's interest rate target will be lowered by 25 basis points.

Falling global risk-free rates, amid headwinds from the Federal Reserve’s rate cuts, have increased the attractiveness of holding U.S. dollar investments, boosting the greenback’s strength, potentially reigniting inflationary pressures overseas and putting enormous pressure on U.S. monetary officials to implement their own rate cuts in the near future.

Western bloc countries, especially the G7, have shown extremely close policy alignment, meaning it is unlikely that the Bank of Canada and the European Central Bank would make such a significant policy change without first consulting the Federal Reserve on when it intends to cut rates.

While the CME Group’s FedWatch tool shows little change in U.S. interest rates through September, it’s clear that global policymakers are coordinating lower rates, lighting the way toward an aggressive rate-cutting cycle.

Bulls were encouraged by this development, sending stock indices and crypto prices soaring after hitting new cycle highs , even though the US rate cut largely caught the seemingly hawkish Federal Reserve by surprise, a stance that was reversed at the first sign of objectively troubling economic data.

Many data series already show that a recession has already begun, and if combined with the emerging global trend toward loose monetary policy (especially among key economic allies), the Federal Reserve could surprise with a rate cut next week.

During the global financial crisis, Federal Reserve officials slashed interest rates by 0.75% on January 22, 2008, in an attempt to revive the deteriorating economy and stem the stock market's slide.

While these rate cuts succeeded in providing a temporary bullish tailwind for risk assets, allowing the broad-cap S&P 500 to rebound nearly 15% from its lows, they unfortunately ultimately failed to have a lasting impact, with the index’s price falling by half by the end of the year.

Policymakers’ need to cut rates is a harbinger of impending economic trouble, and historically, the tools available to central banks have proven unable to stop the economic downturns they want to prevent.