The Fed is Ready to Cut Rates: Where’s the Crypto Market Growth?

Next week will be extremely important for financial markets. On September 18, the Fed will announce its interest rate decision and start the new rate cut cycle.

Markets expect that the most probable scenario is a 25 bps rate cut. It should be noted that traders do not rule out the possibility of a 50 bpd cut. From a big-picture point of view, the Fed is expected to cut rates by 75 - 100 bpd by the end of this year to provide support to the labor market, which has already started to show signs of weakness.

Rate cuts improve the liquidity situation in the markets and make money cheaper, which usually serves as support for riskier assets. However, markets do not look too bullish right now.

Crypto markets have settled well below highs that were seen back in March and remain under some pressure. The tech-heavy NASDAQ index has pulled back from this year’s highs by roughly 10%. Why are markets not rallying ahead of the start of the new rate-cut cycle?

Markets are worried about the potential slowdown of the global economy. The situation in China’s economy is a key problem for investors. The country’s economy has not fully recovered after the coronavirus pandemic, and the government’s attempts to provide stimulus have not yielded tangible results. China’s real estate sector, which was one of the key drivers of the country’s growth, shows no signs of improvement.

The recent data indicates that China’s imports increased by just 0.5% year-over-year in August. Put simply, China’s demand remains under material pressure. Meanwhile, it looks like the U.S. labor market has started to cool down, which signals that the U.S. economy may be slowing down.

Worries about weak China and the potential slowdown of the American economy have impacted investors’ risk appetite. Both cryptocurrencies and tech stocks are sensitive to fluctuations in market sentiment.

When investors are ready to increase their risks in search of profits, they buy cryptocurrencies and tech stocks. In the opposite scenario, which implies rising demand for safe-haven assets, crypto and tech find themselves under pressure.

The flight to quality has been going on in crypto markets for quite some time as investors increased their exposure to safe-haven assets. As a result, Bitcoin's dominance has been growing steadily since the start of the year and has already surpassed the 55% level.

Jerome Powell’s comments may change the market sentiment and boost investors’ appetite for risk. Traditionally, markets pay close attention to the Fed Chair’s comments, so they will have a major impact on market dynamics.

In case Powell signals that the Fed is ready to start cutting rates aggressively to provide additional support to the economy, investors will rush to buy riskier assets, which will be bullish for cryptocurrencies. Most likely, Bitcoin will be the biggest beneficiary of dovish Powell. In this scenario, investors’ demand for altcoins should also increase as they will search for bargains among coins that have suffered serious pullbacks in recent months.