Bitcoin Price Drops With Fed Rate Cuts On The Horizon: Calm Before The Storm?

Bitcoin (BTC) price declined by 2.7% in the past 24 hours as the US Federal Reserve (Fed) looks poised to initiate its widely anticipated rate-cut cycle this week.

Why Did Bitcoin Decline Ahead Of Rate Cuts?

Hovering around $60,000 throughout most of the weekend, BTC price experienced a slump of 2.7% ahead of the Fed’s expected rate cuts likely to begin this week. Interestingly, the price action exhibited by the largest cryptocurrency by market cap aligns with the prediction by former BitMEX exchange CEO, Arthur Hayes.

Assuming the Fed decides to initiate rate cuts this week, it will be the first in 4 years that interest rates will be slashed amid easing inflation to stimulate the economy.

Data from Polymarkets indicates that bettors are giving it a 57% chance that the Fed cuts rates by 50 basis points (bps), while the odds for a 25 bps are at 42% at press time.

After the unprecedented COVID-induced money printing in 2020, the Fed had a tough challenge in tackling surging inflation on the back of supply-chain bottlenecks and currency debasement. Consequently, the Fed embarked on a rate-hike cycle in March 2022, with the last rate-hike done in July 2023.

Typically, rate cuts are seen as a bullish development as they lower borrowing costs for businesses, increasing their appetite for risks and enabling them to expand their operations. Naturally, it is also expected that some of the fresh monetary stimulus is absorbed by risk-on assets such as stocks or cryptocurrencies, propelling them higher.

However, things are not looking as routine this time around as many experts have opined that rate cuts might not have the expected effect on risk-on assets. There can be various reasons behind this assessment.

For instance, rate cuts during times of economic uncertainty and high unemployment might send a signal to investors that the Fed is in damage-control mode and is not too confident in the current health of the economy to avoid heading into a potential recession.

Similarly, rate cuts could be an example of a ‘buy the rumor, sell the news’ event. In such situations, savvy investors tend to drive up the price of risk-on assets in anticipation of easier monetary conditions after the initiation of the rate-cut cycle.

As the event approaches – in this case, the rate cuts – investors might sell these assets to book their profits, resulting in a price decline before the official rate cut.

Price declines in risk-on assets ahead of anticipated rate cuts could also stem from fears surrounding stubborn inflation. While the headline Consumer Price Index (CPI) data for August 2024 came in lower than expected, core CPI was slightly higher than economic forecasts, indicating that the battle against inflation hasn’t been decisively won yet.

Can US Presidential Elections Ignite Another Bullish Momentum?

While the panic before rate cuts might damage Bitcoin and cryptocurrency prices in the short-term, another major event that could decide the future price trajectory of digital assets is the US Presidential Elections.

Republican candidate and former President Donald Trump has voiced his support for the crypto industry on various occasions. A recent report by Bernstein predicted that BTC could reach as high as $90,000 in Q4 2024 if Trump wins the election.

However, a Kamala Harris win might send the leading cryptocurrency to test price levels as low as $30,000. At press time, Bitcoin is trading at $58,498, down 2.7% in the 24 hour timeframe.

Featured Image from Unsplash.com, Chart from TradingView.com