The Federal Reserve, the central bank of the United States, is anticipated to initiate interest rate cuts on Wednesday, with analysts projecting a 25 basis point (bps) reduction, potentially boosting risk asset prices in the long run.
According to Nic Puckrin, founder of Coin Bureau and market analyst, crypto prices are closely tied to liquidity cycles. He noted that while lower interest rates generally enhance asset values over time, there may be a short-term price correction ahead.
“The primary risk is that the change is already factored in,” Puckrin remarked, adding, “expectations are high, and there is a significant possibility of a ‘sell the news’ downturn. During such times, speculative assets, particularly memecoins, are the most susceptible.”
Many traders and financial institutions, including Goldman Sachs and Citigroup, anticipate at least two interest rate reductions in 2025, with both expectant of three rate cuts throughout the year.
Oxford Economics forecasts a maximum of two rate cuts in 2025. Ryan Sweet, the firm’s chief US economist, described the three cut outlook as “overly optimistic,” despite the Federal Reserve’s earlier-than-expected rate reductions.
The crypto community, along with investors in various markets, has been bracing for interest rate cuts following a downward revision of over 900,000 jobs anticipated for 2025, indicating a faltering job market in the US and deteriorating macroeconomic conditions.
Related: Crypto markets brace for Fed rate cut amid upheaval in governance
A 25 BPS reduction may trigger a short-term rally, but 50 BPS is excessive
Per the Chicago Mercantile Exchange (CME) Group, 6.2% of traders foresee the Federal Reserve cutting rates by 50 BPS on Wednesday.
A 25 BPS cut could initiate a “temporary rally” in risk-on assets, stated Javier Rodriguez-Alarcon, chief investment officer at digital asset investment firm XBTO.
“Conversely, a 50 bps surprise would raise concerns regarding the economy’s health and underlying growth, putting pressure on markets in the short term,” Rodriguez-Alarcon noted.
Nonetheless, these cuts will eventually drive asset prices higher as investors shift away from cash to pursue investment opportunities, he explained.
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