Fed Cuts Interest Rate, Will Bitcoin (BTC) Benefit?

As expected, the US Federal Reserve lowered interest rates and pointed at another cut by the end of the year.

The US Federal Reserve fulfilled the expectations for a rate cut, shaving off 0.25 percentage points out of the basic interest rate. The scheduled intervention thus brings the interest rate at 2.0%, with a real target of 1.75-2%.

This rate cut seems set to extend a new period of quantitative easing from the Fed, after rates were hiked to a peak of 2.5% in the past three years. The rate cuts mean a subsequent boost to liquidity, but also a potential weakening of the US dollar exchange rate. During the last meeting of the Fed, the central bank signaled at another potential rate cut by the end of 2019.

The initial reactions from cryptocurrency social media pointed to tentative hopes that the period of quantitative easing would bring increased interest in crypto assets.

https://twitter.com/EstoniaAic/status/1174239955717107713

Bitcoin (BTC) was immediately contrasted, for having a fixed supply of coins. However, quantitative easing of the US dollar may mean even higher BTC prices in nominal dollar terms. Currently, the US market has limited effects on BTC price discovery, with relatively small BTC spot markets in comparison with crypto-to-crypto exchanges and derivatives markets. Still, the Fed’s intervention is seen as a significant factor for the crypto space.

Just a day before the rate cut, Fed had to intervene with a liquidity injection on the overnight lending market. A series of events and payment schedules, along with low overnight deposits meant banks lost access to short-term credit for their immediate operations. For now, the event does not signal a loss of trust between banks. But in 2008, in the Eurozone, such drying up of liquidity was one of the harbingers of deepening crisis, which led the European Central Bank to cut rates to zero and keep them low for more than a decade.

It was during that decade, between late 2008 and 2019, that BTC made some of its most dramatic moves. Now, BTC enters another period that slightly resembles the earlier crisis.

In the short term, BTC prices have weakened, as the coin traded around $9,894.18. But there are still expectations for more dramatic appreciation.

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