Although the last few weeks have been very important for the crypto market, this one is a critical one. Analysts and investors in this sector are waiting for the reaction of cryptocurrencies to the new trend in the price of money in the USA.
On September 17-18, the Federal Open Market Committee (FOMC) meets to make a monetary policy decision. As widely anticipated, the meeting will be different because it will see the first rate cut since 2020. The most focused bets expect this rate cut to be 25 basis points. However, expectations for a 0.5% cut are rising sharply.
In either case, the digital currency market, and financial assets in general, could experience a strong rise. Indeed, Bitcoin‘s current positive momentum is related to more aggressive rate cut expectations.
There are many reasons to think that the rate cut will be 0.5%. One of them is the advanced state of cooling in prices. Both CPI and PCE inflation showed signs of slowing down. The other element that completes this equation is the weakening of the labor market. The latter has revived fears of recession over the last 3 weeks.
Would the cut be favorable for the crypto market?
To say that the rate cut guarantees a surefire rally for the crypto market would be a bit of an exaggeration. The FOMC’s monetary policy game is one of balancing, which affects other sectors and also causes side effects. Many of the latter might not be entirely positive.
For example, a 25 basis point cut would leave the rate above 5%. This means it would not have a major effect on market sentiment and might not even be enough to reverse the cooling trend in the employment sector. This is particularly important considering that the next FOMC meeting is on November 6.
That time frame would present an interest rate of 5%-5.25%, which is not very different from the current point of 5.25%-5.5%. Thus, in the worst-case scenario, fear of recession would cause a new decline in risk assets. As can be seen, this is not an inherently optimistic scenario.
However, there is also a huge chance of a more positive outcome. Accordingly, if the high-rate economy continues to weigh on the job market, the Fed could commit to successive 0.5% rate cuts in November and December. By the end of the year, current expectations for a 1.25% rate cut would be met.
This last scenario would be clearly bullish for the crypto market.
The state of interest rates ahead of the FOMC meeting. Source: AFP
The risks of a very aggressive cut
Very aggressive rate cuts could also have positive or negative implications. The former is clear because of the ease with which companies can repay their loans. The latter would lead to a significant economic boom.
But it is also worth considering the side effects of aggressive cuts. These include the weakening of the dollar and the fall in Treasury bond yields. In simple terms, the carry trade strategy would lead to a pronounced loss of liquidity. According to experts cited by Bloomberg, Chinese companies would repatriate up to $1 trillion.
According to data compiled by CriptoTendencia, firms in the Asian country hold between $2 and $3 trillion in dollar-denominated assets. The decline of the dollar against the yuan would prompt them to take part of them back to Beijing. Basically, the relative rapprochement between the rates of both central banks would make it redundant to hold those dollar-denominated assets.
This drop in the dollar against the yuan would stimulate trade, but the outflow of large sums would not fail to be felt in the markets. For the crypto market, this would be a strong test.
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