The Federal Reserve, the U.S. central bank, is anticipated to start reducing interest rates on Wednesday, with analysts predicting a 25 basis point (bps) cut, which may enhance risk asset prices over time.
According to Coin Bureau founder and market analyst Nic Puckrin, crypto prices closely track liquidity cycles. Although lower interest rates generally elevate asset prices in the long run, Puckrin cautioned about a potential short-term price dip.
“The primary risk is that the adjustment is already anticipated,” Puckrin stated, adding, “expectations are high, and there’s a significant chance of a ‘sell the news’ decline. When this occurs, speculative assets, particularly memecoins, are likely to be the most affected.”
Many traders and financial firms expect at least two interest rate reductions in 2025, including investment bank Goldman Sachs and banking giant Citigroup, both predicting three cuts for the year.
Oxford Economics estimates a maximum of two cuts in 2025. Ryan Sweet, chief U.S. economist at the firm, commented that three cuts were “overly optimistic,” even with the Federal Reserve potentially reducing rates sooner than expected.
The crypto community and investors across markets are eager for interest rate reductions, following downward revisions of over 900,000 jobs for 2025, signaling a weakening U.S. job market and declining macroeconomic conditions.
Related: Crypto markets brace for Fed rate cut amid governor reshuffle
A 25 BPS cut may trigger a short-term rally, but 50 BPS is too ambitious
According to the Chicago Mercantile Exchange (CME) Group, 6.2% of traders foresee the Federal Reserve reducing interest rates by 50 BPS on Wednesday.
A 25 BPS cut could ignite a “temporary rally” in risk-on assets, asserted Javier Rodriguez-Alarcon, chief investment officer at digital asset investment firm XBTO.
“Conversely, a surprise cut of 50 bps would escalate concerns regarding the economy’s health and overall growth, negatively impacting markets in the short term,” added Rodriguez-Alarcon.
Nonetheless, these cuts are projected to boost asset prices in the long run as investors shift from cash to investments, he stated.
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