Binance has published an analysis of the potential impact of the Fed’s interest rate decision on cryptocurrency markets as the Federal Open Market Committee (FOMC) prepares for its meeting on September 17-18, 2024.
Markets are expecting the first of a series of rate cuts following recent comments from Fed Chair Jerome Powell at the Jackson Hole Symposium, signaling a shift in monetary policy.
According to Binance’s report, the expected rate cuts could significantly affect cryptocurrency prices, as the crypto market tends to be highly sensitive to macroeconomic changes. Lower borrowing costs are expected to increase liquidity in the financial system, which in turn will increase demand for risky assets like cryptocurrencies.
“Historically, cryptocurrencies like Bitcoin have responded negatively to interest rate hikes and positively to interest rate cuts,” Binance said. For example, Bitcoin prices increased by 375% from February 2020 to February 2022, when the Fed lowered interest rates to near-zero levels and maintained them.
The analysis suggests that interest rate cuts could further increase demand for crypto assets due to their anti-inflationary properties. Inflation concerns can arise as low interest rates increase spending and borrowing. In such cases, investors may turn to cryptocurrencies as a hedge against inflation, pushing prices higher.
Additionally, Binance noted that a weak US dollar, which is often caused by low interest rates, could make cryptocurrencies more attractive as an alternative store of value.
But not all experts are optimistic. Binance also noted concerns that the expected benefits of the rate cuts may already be priced into the market. Moreover, the magnitude of the cuts could have different effects on the BTC price. According to the report, a smaller, 25 basis point cut could gradually boost crypto markets by easing recession fears, while larger cuts could trigger concerns of a deeper economic downturn, which could negatively impact risky assets like cryptocurrencies.
*This is not investment advice.