What to expect from the FOMC meeting and its potential impact on crypto

With the FOMC meeting approaching, could a rate cut provide the liquidity support Bitcoin needs to recover, or would a smaller rate cut cause market tension?

All eyes on FOMC meeting

The Federal Open Market Committee is set for another critical meeting on September 18, and all eyes are on what the Federal Reserve will do next.

The U.S. economy added 142,000 jobs in August, 28,000 more than in July, providing a slight boost to confidence. But it’s not all rosy — the revisions reduced jobs by 89,000 from the previous two months and signaled the job market may not be as strong as it seems.

Private sector employment saw a modest increase of 118,000, while the unemployment rate fell to 4.2 percent after temporary layoffs ended.

On the inflation front, the picture is clearer but a bit confusing. In August, consumer price inflation fell to its lowest level since February 2021, reaching 2.5% on a 12-month basis, slightly below the 2.6% forecast.

However, excluding volatile food and energy sectors, core inflation rose by 0.3 percent, above expectations.

This leaves the Fed in a difficult position: While overall inflation is falling, core inflation remains a problem for them, holding steady at 3.2%.

So what will the Fed do next? While many are expecting a quarter-point rate cut, even a half-point rate cut is on the horizon. So where could the cryptocurrency markets go next? Let’s examine the possible scenarios and what experts think will happen next.

How much will the Fed lower interest rates?

Historically, rate cuts have boosted risk assets, and many are hoping for the same this time around, especially for crypto assets like Bitcoin (BTC). But how much the Fed decides to cut will have a big impact on how markets react.

Currently, investors are torn between two possibilities: a 25 basis point (bps) cut or a more aggressive 50 bps cut.

According to a September 16 report by the CME Watchtool, there is a 41% chance that the Fed will cut rates by 25 basis points to a range of 5%-5.25%. However, there is a 59% chance that a larger, 50 basis point cut would bring rates to a range of 4.7%-5%.

A 50 basis point cut could spook rather than boost markets, analysts at 10x Research say. Such a big move could signal the Fed is concerned about the economy, which could make investors wary of holding riskier assets like Bitcoin.

In this case, a sell-off in cryptocurrencies and stocks could be seen as investors pull back, and more economic problems could occur in the future.

Ultimately, how the cryptocurrency market responds will depend on what investors have already priced in. After the decision, all eyes will be on Fed Chair Jerome Powell’s comments as investors look for clues as to what could happen next.

What’s next for Bitcoin?

As the cryptocurrency market awaits the Fed’s upcoming interest rate cut decision, Bitcoin is struggling to break through a key resistance level.

Bitcoin has failed to break above $62,000 multiple times since early August and is hovering around $58,600, down more than 2% as of September 16.

According to renowned macro investor Craig Shapiro, this price action is closely tied to the market’s demand for liquidity, which he calls the “PALM” or “the ever-accelerating liquidity machine.”

The Fed doesn’t want to start with a 50 basis point rate cut because frankly, there’s no need for the economy to panic at this point.

The market wants them to start at 50 and go bigger and faster because the market is acting like a petulant child that constantly needs “more” liquidity. My…

— Craig Shapiro (@ces921) September 6, 2024

Shapiro explains that the market acts like a “petulant child” by selling risky assets when it can’t get enough liquidity from the Fed.

Shapiro believes the Fed needs to cut interest rates by 50 basis points (bps) to meet the market’s liquidity needs. He warns that a smaller 25 bps cut could disappoint investors and lead to a further correction in Bitcoin and other risk assets.

Essentially, the market is looking for a “Fed put expiration price,” the level at which the Fed will step in to prevent a deeper decline.

But a larger 50 basis point cut to address urgent liquidity needs could signal deeper economic concerns. Historically, aggressive cuts have shown central banks are concerned about slowing growth, which can trigger sell-offs rather than rallies.

The irony is that while more liquidity can raise asset prices, too much and too fast liquidity can have the opposite effect.

But there is hope for Bitcoin bulls. According to crypto analyst Miles Deutscher, Q4 has historically been the strongest quarter for both the S&P 500 and Bitcoin.

2. The 4th quarter is also the strongest quarter #Bitcoin (by far).

During this period, $BTC It provides an average return of 88.84%.

Over the last 2 halving years (including this year), BTC has increased by 58.17% (2016) and 168.02% (2020).

The 3rd quarter is also the WORST period we have experienced this year. pic.twitter.com/G1Zhc4KPAx

— Miles Deutscher (@milesdeutscher) September 14, 2024

[Since1945theS&P500hasgainedanaverageof38%in4quartersandhasbeenup77%ofthetimeBitcoinhasreturnedaremarkable88%in4quartersonaverageandsawgainsof58%17%and168%02%inprevioushalvingmonthsin2016and2020respectively[1945’tenberiS&P5004çeyrekteortalama%38kazandıvezamanın%77’sindeyükseldiBitcoin4çeyrekteortalama%8884’lükdikkatedeğerbirgetirieldeettive2016ve2020gibiöncekiyarılanmayıllarındasırasıyla%5817ve%16802’likkazançlargördü

While Bitcoin’s historical worst-performing quarter has been Q3, a recovery could occur in Q4, especially if the Fed’s rate cut matches expectations.

However, volatility risks remain if the Fed’s action is smaller than expected or macroeconomic conditions deteriorate.

What lies ahead?

After the Fed’s decision on Sept. 18, the focus will be on Fed Chair Powell’s comments. His outlook for future rate cuts could set the stage for a strong fourth-quarter rally or keep markets on edge.

If Powell hints at more rate cuts down the road, Bitcoin and other risk assets could get the fuel they need to climb, but if he’s cautious, we could see more market tension.

At the same time, the US presidential election in November adds to the complexity.

Republican candidate Donald Trump has openly embraced crypto, launching his own project, World Liberty Financial, and other crypto-focused ventures. His clear stance could appeal to crypto advocates looking for a favorable regulatory environment.

On the other hand, Democratic Party Vice Presidential candidate Kamala Harris has largely remained silent on the subject of crypto and her views on the subject are unclear.

With both candidates representing vastly different approaches, the election could be a significant turning point for the cryptocurrency market as investors consider their options heading into 2025.