Bitcoin Faces Volatility Ahead of Potential 25-Basis-Point Fed Rate Cut, Warns Economist Steve Hanke

• The potential for a 25-basis-point rate cut by the U.S. Federal Reserve next Wednesday is becoming a focal point in financial markets.
• Economists and analysts are weighing the possible implications of such a move, noting that it may already be priced into current market valuations.
• “A 25-basis-point cut is already anticipated by the market, which means the actual cut might underwhelm, triggering a sell-the-news response,” stated Steve Hanke, an economist at Johns Hopkins University.

Is the Federal Reserve’s Anticipated Rate Cut Already Priced In?

Market Expectations Ahead of FOMC Meeting

The upcoming Federal Open Market Committee (FOMC) meeting, scheduled for September 18, is creating a buzz among traders and financial analysts. The CME FedWatch tool shows a 57% likelihood of a 25-basis-point rate cut and a 43% chance of a more substantial 50-basis-point reduction. This shift from a 13% probability to a 43% probability for the latter option over the past 24 hours indicates heightened market sensitivity to monetary policy decisions.

Impact on Risk Assets

Steve Hanke, who once managed the world’s top-performing fund, the Toronto Trust Argentina, noted that a 50-basis-point cut, if realized, could reignite market optimism. However, it could also introduce substantial market volatility, particularly for riskier assets like Bitcoin and other cryptocurrencies. In light of these uncertainties, Hanke is recommending safer investment alternatives such as the 10-year U.S. Treasury bond and gold.

Potential Reactions from the Crypto Market

The current pricing of Bitcoin, hovering around $58,121, has only seen a 0.1% increase over the past 24 hours, and Ether has remained steady at $2,353. This stagnant price movement amidst speculation about rate cuts underscores the cautious approach investors are adopting. 21Shares Research Analyst Leena ElDeeb highlighted that a 50-basis-point cut might lead to increased caution among investors, as it could signal the Federal Reserve’s response to looming recessionary threats. In turn, this could put pressure on risk-on assets in the short term.

Rate Cuts and Neutral Rate Dynamics

Current interest rates are positioned 150-200 basis points above what is considered the neutral rate for the U.S. economy. The neutral rate is the level at which monetary policy neither stimulates nor restrains economic growth. The debate revolves around whether the Fed should take more aggressive action to align rates closer to this neutral benchmark. “So the question is: ‘Why not just get started?'” one analyst quipped, suggesting immediate action might be warranted.

Conclusion

In summary, as the financial community braces for the Federal Reserve’s upcoming decision, the consensus is mixed but leaning towards a 25-basis-point cut. The potential market reactions span a spectrum from volatility to cautious trading, particularly within the cryptocurrency sector. Investors would be well-advised to monitor the FOMC’s actions closely, considering both secure fixed-income options and the inherent risks within more volatile markets.