Friday’s U.S. jobs report has opened the door for the Federal Reserve (Fed) to begin reducing interest rates, with the first move expected as soon as next week. However, this liquidity easing cycle, while traditionally seen as bullish, may not be as favorable for risk assets, including cryptocurrencies. According to 10x Research, a significant cut of 50 basis points (bps) could spark concern among investors.
In financial terms, a basis point (bps) represents 1/100 of a percentage point. Typically, central banks like the Fed adjust interest rates by 25 basis points at a time. However, more aggressive moves, such as the 50 bps or even 75 bps hikes seen during 2022, signal urgency. These larger increases aimed to rein in inflation but also triggered risk aversion in financial markets.
Should the Fed opt for a 50 basis point cut next week, it could indicate growing economic worries or that the Fed is struggling to keep pace with the looming economic downturn. Such a move might lead investors to reduce their exposure to riskier assets, such as bitcoin (BTC) and stocks.
“While a 50 basis point cut may hint at deeper concerns for the markets, the Fed’s main goal will be to address economic risks, not to cater to market reactions,” explained Markus Thielen, founder of 10x Research. Thielen had previously forecasted Bitcoin’s first-quarter rally to $70,000 and shared these insights with clients on Monday.
At present, the Chicago Mercantile Exchange’s (CME) FedWatch tool places the likelihood of a 50 basis point cut at nearly 30%, bringing rates down to the 4.75%-5% range.
“The probability of a 50 basis point cut is currently 29%, which contrasts with our view and the broader consensus. There’s a growing belief that the Fed may have missed signals of labor market weakness after being surprised in July,” added Thielen.
This perspective aligns with the general consensus among financial experts. “The Fed isn’t likely to start with a 50bps cut, as there’s no need for panic given the current economic conditions,” macro trader Craig Shapiro commented on X (formerly Twitter).
Shapiro pointed out that while markets may prefer a 50 bps cut due to their reliance on liquidity, they could see a correction until the Fed moves more aggressively. “Risk assets will continue to adjust until the Fed gives in. However, with risk asset prices still high and economic growth steady, we may be far from the point where the Fed needs to act,” he explained.
Historically, the start of a rate-cutting cycle does not always have an immediate positive impact on asset prices, regardless of the size of the initial cut. It’s also worth noting that expectations of Fed easing have already played a role in Bitcoin’s rise from $20,000 in January 2023, raising the question: Is the potential rate cut already priced into the market?
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