The US Federal Reserve (Fed) has cut its interest rate by 0.5 percentage points, bringing it to 5.0%. This is the first reduction since 2020 by the agency led by Jerome Powell.
As reported by CriptoNoticias, bitcoin (BTC) and cryptocurrencies reacted with high volatility after the agency’s decision was announced. In contexts of lower interest rates, the cost of borrowing is lower and investors can take out loans to place them in assets considered risky to obtain higher returns.
Although the cut was within the expectations of some analysts The Fed’s decision could be, from some points of view, a bad sign for the future of the US economy.
For Juan Villaverde, an econometrician and mathematician dedicated to cryptocurrency analysis, the agency applied a more aggressive cut than expected because “it realized that it had been ‘a little late’ to address inflation, which had been silently increasing since 2021 while rates remained close to zero.”
It is important to remember that rates remained at around 5.25% and 5.5%, their highest level in two decades.
In mid-2022, the Fed implemented a series of interest rate increases with the aim of slowing economic growth and thus controlling the consumer price index.
In that sense, Villaverde points out “Today, markets are focused on one thing: last week’s ‘giant’ rate cut – and promises of more to come – tells us a recession is coming.” He believes:
“When the Fed cuts rates aggressively, it is a signal that it is concerned about a recession. In turn, the market could interpret this as a big warning signal of ‘WARNING: A recession is coming.’”
Juan Villaverde, econometrician and cryptocurrency market analyst.
He also notes that “the huge surge in cryptocurrency prices we have seen since Wednesday may not necessarily last” and adds: “Such is the non-linear nature of markets.” In other words, their behavior does not always follow predictable patterns.
With this expression, the analyst mentions what happened in 2022, when the Fed raised interest rates and created downward pressure on the price of bitcoin and cryptocurrencies.
As seen in the following graph, TradingViewthe price of the digital currency created by Satoshi Nakamoto plummeted below $24,000 in the first months of 2022.
Beyond the specialist’s opinion, it is worth noting that the price of BTC shot up above $63,000 after the Fed’s announcement.
According to Villaverde’s thesis, investors should focus on global liquidity, referring to the money that enters the system. “We are starting to see signs of liquidity injections, especially from China, and there are signs that the Federal Reserve is also starting to inject cash,” he says, adding:
“That is the real catalyst for rising cryptocurrency prices: not interest rate cuts per se, but the liquidity injections that could soon follow.”
Juan Villaverde, econometrician and cryptocurrency market analyst.
Finally, he highlights that The main catalyst for BTC price and cryptocurrencies The next US presidential election is coming up.which will take place on Tuesday, November 5. “Until then, short-term corrections can be used as buying opportunities for quality cryptocurrency projects,” he concludes.
There are opposing opinions
Unlike Villaverde, there are analysts who argue that the interest rate cut will be beneficial for BTC and cryptocurrencies, added to the indicators that suggest a possible “soft landing” scenario for the US economy.
For example, Coinbase, the largest cryptocurrency exchange in that country, explains in its most recent weekly report that “the positive market reaction to the decision (in both traditional assets and cryptocurrencies) reflects the Fed’s relatively clear communication about the future path of monetary policy.”
In turn, it clarifies that although non-farm payroll (NFP) data has been weak so far in 2024, projections for increases in gross domestic product (GDP) and sustained levels of consumer spending and of sale of mYonorists are signs that dispel rumours of a recession.
