Bitcoin markets are gearing up for a volatile month as expectations of an upcoming rate cut by the U.S. Federal Reserve draw widespread attention.
After Bitcoin’s price plunged sharply from $65,000 in late August to around $59,000 in early September, markets are expecting more turbulence. The outcome of the next Federal Reserve meeting, which is expected to trigger a rate cut, will likely determine the short-term direction of the Bitcoin-to-dollar exchange rate, but what is making markets more nervous is the potential for deeper economic instability.
Most market participants expect a 25 basis point rate cut, but there are also rumors that the Fed may take a more aggressive 50 basis point rate cut, a move that is likely to trigger greater market volatility. As the global economy struggles under the weight of central bank mismanagement and market distortions, investors who use Bitcoin as a hedge against currency debasement may face a test of confidence.
The impact of the Fed’s rate cut on Bitcoin
Expectations of an upcoming rate cut by the Federal Reserve have heightened market uncertainty. Historically, rate cuts are generally seen as bullish for Bitcoin because monetary easing tends to weaken the dollar and boost demand for assets. But this rate cut could be a double-edged sword.
In 2022, the Fed embarked on an aggressive rate hike cycle in an effort to curb inflation, but now, as economic conditions deteriorate, the Fed is forced to pivot. This is to be expected in a financial system that relies on continuous liquidity injections.
For Bitcoin, despite its history of benefiting from monetary easing, the Fed’s decision could have unexpected results. As an alternative to fiat currencies, Bitcoin excels especially when currencies are devalued. However, a potential aggressive 50 basis point rate cut introduces a factor that market participants may not have fully considered: concerns about an impending economic slowdown or even recession. If the Fed sends a signal of deeper economic concerns, market participants may avoid assets they deem riskier, including Bitcoin, even though its value as a decentralized currency network has not changed.
Does a 50 basis point rate cut indicate deeper problems?
Concerns about a 50 basis point rate cut stem from the broader macroeconomic backdrop, with the Fed’s emergency rate hikes in 2022 aimed at curbing inflation but also exposing underlying weaknesses in the economy — weaknesses that are now emerging in the form of a slowing labor market.
Last Friday’s jobs report was another chapter in a multi-year underperformance of the U.S. labor market. Until now, this trend has been masked by exaggerated jobs reports that have been repeatedly revised down after their initial release. The most recent report actually showed signs of labor market weakness when it was released, with the Bureau of Labor Statistics’ household survey showing that the unemployment rate had not improved in the past month and the number of unemployed people had increased from 6.3 million to 7.1 million in the past year. This means that the labor market has actually been so weak that the weakness can no longer be hidden.
Many employed people are still struggling financially. Depending on the measure, the purchasing power of U.S. wages is either keeping pace with inflation or lagging behind it.
Federal Reserve Chairman Jerome Powell (Photo by Alex Wong)
The State of the Global Economy and the Long-Term Outlook for Bitcoin
Central banks around the world are also grappling with the challenges of weak economies, with both the European Central Bank and the Bank of Japan facing conundrums that could affect global liquidity flows. Eurozone GDP grew by just 0.2% last quarter, while the Bank of Japan is considering raising interest rates, which would accelerate the unwinding of the yen carry trade. Meanwhile, a major country is preparing to inject liquidity into its slowing economy in an attempt to stave off a recession as factory output, consumption and investment have all slowed and unemployment has risen to a six-month high.
In addition to this, the intense presidential election season in the United States also brings uncertainty about the outlook for economic policies that could negatively impact investment and economic growth. If candidates supporting these policies gain political momentum, the Bitcoin-to-USD exchange rate is expected to become more volatile.
Bitcoin has a "multiple personalities" in relation to global economic conditions, making its price movements difficult to predict. In some cases, such as the early days of the war in Ukraine, Bitcoin behaves as a risk-averse asset; in other cases, such as the early days of the COVID-19 outbreak, it behaves as a risk-seeking asset.
What is clear, however, is that attempts by central banks to paper over deep cracks in the rules-based order by injecting liquidity will only serve to highlight the long-term advantages of Bitcoin, whose monetary properties will ultimately prevail over time.
September, an unforgettable moment for Bitcoin?
As September progresses, Bitcoin investors are bracing for possible volatility. The Federal Reserve’s upcoming rate cut decision has made Bitcoin’s outlook uncertain. While the market may have priced in a 25 basis point rate cut, limiting its short-term impact, a 50 basis point cut could signal deeper economic problems and trigger a wave of volatility.
However, there is still room for surprises in the market. If the Fed can find the right balance between addressing economic risks and maintaining market confidence, Bitcoin could emerge from this turbulent period in a stronger position. However, if recession fears continue to mount, Bitcoin’s price could fall further, and investors will have to deal with an increasingly unpredictable market.
