Federal Reserve Cuts Interest Rates: Impacts on Risk-On Assets

Federal Reserve- Bitcoin and Ether Surge: How the Fed’s Rate Cut Influences Digital Assets

Federal Reserve– On September 18, the Federal Open Market Committee (FOMC) made a pivotal decision that significantly impacted risk-on assets. The Federal Reserve cut interest rates by 50 basis points, establishing a new target range for the federal funds rate at 4.75% to 5.00%. This move sparked debate regarding its implications for the economy and various asset classes.

The Debate: Are We Heading for a Recession?

The rate cut has triggered discussions among analysts and economists. Some argue that the Fed may have been late in its rate-cutting cycle, potentially signaling an impending recession. Historically, the last two instances when the Federal Reserve initiated a 50 basis point cut coincided with the 2001 and 2008 recessions, raising concerns that this current cut could signal similar economic challenges.

On the other hand, some experts suggest that the Federal Reserve may be navigating a Goldilocks period, characterized by sustainable economic growth. With U.S. GDP growth for Q2 at a solid 3% annualized and headline inflation dropping to 2.5%—the lowest level since March 2021—the need for real rates to remain elevated diminishes. Furthermore, the Atlanta Fed’s GDPNow model forecasts a Q3 GDP growth estimate of 2.9%, indicating a balanced economic environment.

Positive Reactions in Key Macro Assets

Following the FOMC decision, the cryptocurrency market experienced a significant rebound. Ether (ETH) surged nearly 14%, reflecting a renewed risk appetite among investors. Cat-themed meme coins also emerged as top performers, gaining 40% in just a week. Bitcoin (BTC) saw an increase of over 5%, although its market dominance dipped below 58%, suggesting a broad rally across other digital assets.

Key macro assets reacted positively as well. The U.S. Dollar Index (DXY) rose by 0.36%, climbing back above the critical 101 level. The USD/JPY exchange rate, which had fallen to around 141 before the Fed’s announcement, rose to approximately 143.5, aided by a weakening yen that further bolstered risk-on assets, including cryptocurrencies. Additionally, crude oil prices increased over 2%, likely influenced by ongoing geopolitical tensions in the Middle East, while gold also saw gains.

Strong Inflows into Crypto ETFs

The optimism in the cryptocurrency market was further buoyed by inflows into both Ether and Bitcoin ETFs on September 19 and 20. Ether-based ETFs recorded $8.1 million in inflows, while Bitcoin ETFs saw significantly larger inflows of $250.3 million, according to Farside data.

Examining the performance from a broader market perspective reveals that large, mid, and small-cap coins had underperformed leading up to the FOMC decision. However, post-announcement, small-cap cryptocurrencies have emerged as the biggest winners. All three capitalization groups—large, mid, and small caps—have reached relative highs against Bitcoin since the Fed’s announcement, showcasing a general increase in risk-on sentiment and liquidity across financial markets.

Looking ahead, the CME Fed Funds futures indicate a 50/50 probability of either a 25 or 50 basis point rate cut at the upcoming November 7 FOMC meeting, which is scheduled just two days after the U.S. presidential election.