The Federal Reserve’s latest meeting revealed a 25-basis-point rate cut, which brought the benchmark range to 3.75%-4.00%. This should have been celebrated by the investors, after all, rate cuts bring in more liquidity and increased risk-factor, yet it had a parallel impact on the market. The crypto market turned lower with Bitcoin slipping over 2% followed by Ethereum and others. The reason – there was no surprise factor in the decision, meaning, traders already anticipated it well in advance.
This muted counterintuitive reaction is the problem, for it reads the message the Fed chair wanted to deliver.
Markets had already priced it in 
Firstly, this move, as we have already mentioned, was expected by the investors. So there were no brownie points hidden in it; in fact, the futures market priced a 25-bps cut weeks in advance. So, the rate cuts left little room for an upside reaction.
What traders actually focused on was the tone of the Fed Chair Jerome Powell. And that is where things went downtrend. The cautious tone of the Fed Chair hinted at division between the FOMC, with some policymakers believing in keeping higher rates and others voting for no rate cut. His speech refrained from commitment to an extended easing cycle, which translated as a drop in short-term confidence.
The Tone
Theoretically, a rate cut means added liquidity in the market; however, this time, the market moved in line with the sentiments. It was the tone everyone focused on. Powell’s comments reflected the Fed’s inflation concerns and hesitance to pave a clearer path towards multiple cuts in the future. He also hinted at the need for factual government data, which was missing this time due to the government shutdown.
For the crypto investors, the message came as much slower liquidity growth, deepening short-term sentiments, and prompting investors to rotate their assets into safer options.
Profit-taking scenario
Bitcoin was surging before the Fed’s announcement, fueled by optimism around rate cuts and institutional inflows. So, by the time the Fed made its announcement, Bitcoin was already at the point where profit booking was expected. When Powell’s comments fueled a dovish path further, many traders locked in their gains.
It is often seen that, post any major announcement, Bitcoin shows a sharp pullback even in a bullish macro phase. So, it is anything between 5%-10% of correction that can be expected as a part of the behavioural cycle and cannot be termed as a signal of trend reversal. Altcoins, however, mirrored the decline, categorising them as liquidity-sensitive assets reacting to a macro sentiment.
Unexpected rebound
It is usually seen that the dollar weakens after a rate cut; this time, however, it bounced back post announcement. A stronger dollar adds downward pressure on the crypto prices, making them move inversely. This time, the dollar index rebounded above 104 for some time, which might have spooked short-term crypto traders, adding to the selling pressure.
Short-term pain or long-term opportunity?
Despite the market reacting red post rate cut, the long-term sentiments remain structurally bullish for crypto. In the long term, any rate cut, big or small, means higher liquidity and weaker fiat. Both are ideal for the crypto rally. This narrative further gets its strength through the outlook generated by historical data, which makes November a month when Bitcoin mostly performs positively.
So, even though there is short-term volatility, there is no denying that crypto will only grow more in the future. Once the market comes around to the Fed’s tone, it will adjust with the fundamentals, expectations, and institutional adoption, continuing to strengthen its growth.
Macro meets sentiments
The crypto market today plays around the lines of psychology. It’s no more about policies and liquidity but also about the sentiments shaping the announcement. Traders look out for numbers along with the tone, timing, and uncertainty. The confidence and clarity in the central bank’s communication are playing a vital role in driving momentum more than before. This time too, it has been the same, and now investors are eying two upcoming factors. First, the release of inflation data, which can determine the Fed’s stance towards future rate cuts in December. And second, institutional inflows in ETFs of Bitcoin and Ethereum, which in turn, may compensate for this short-term volatility.
If inflation remains under control, we will be able to see the Fed easing down with another rate cut in December, pivoting the crypto market to green.
Bottom line
The 25-bps rate cut was not the catalyst the market hoped for this time; it was the lack of clarity on future easings that had dampened its spirits. Even so, the fundamentals remain the same, and the market is expected to rebound once the initial phase of sell-off is over.
Yet, one thing is absolutely clear: the market’s mood will also react to how the Fed communicates its intentions.
FAQ
- How do interest rate cuts usually affect crypto markets?
Usually, when the Fed cuts the rate, fiat currencies weaken, which increases investors’ risk appetite, bringing in more liquidity into the market. However, if the rate cut is expected before the announcement, the same liquidity is brought in earlier, leaving a little room for immediate upside. The same happened this time too. The market anticipated the rate cut and moved on its momentum, and, as soon as the announcements were made, profit booking started.
- Why are traders now more sensitive to the Fed’s tone than its actions?
With time, we have seen a lot more maturity in the crypto market, and traders no longer look just for the numbers. They now interpret everything from tone, timing, to underlying intent, and only then make their decision. This is the reason why Powell’s cautious language signalled that liquidity may not expand as hoped.
- How does government data delay affect Fed decisions and crypto sentiment?
Amidst the U.S. government shutdown, there have been partial gaps in getting the data. The Fed, hence, is operating cautiously, driven by uncertainty. This lack of clarity is making crypto trading more sentiment-driven because it is still difficult to understand what the Fed’s attitude might be in the future.
