Bitcoin Price Rises 5% to $61K Before Fed Meeting, but Market Data Indicates Potential Limit to Rally

The financial market is currently in a state of uncertainty regarding the Federal Reserve’s upcoming decision on whether to implement a 25 basis point cut or pursue a more substantial 50 basis point adjustment. Just over a day before the central bank’s announcement, investors have factored in a 63% likelihood for the larger reduction, as indicated by the CME FedWatch Tool.

Market participants are showing enthusiasm for the potential of a more significant rate cut by the Fed at the upcoming meeting, a move that is perceived as favorable for investors. This sentiment has led to a shift in yield differentials away from the U.S. dollar, according to Kruger.

However, the situation is not as simple as it may seem. Analysts at K33 Research have pointed out that the possibility of more substantial cuts could trigger a nervous response in risk asset prices. Drawing parallels to the 2001 and 2007 recessions, K33 Research highlighted that such significant rate reductions have historically signaled increased recession risks in the U.S. Nevertheless, the analysts caution against directly comparing the current scenario to past events, citing that real rates are currently at their peak and inflation has been decreasing in recent months, allowing for a potentially faster pace of rate cuts. Presently, market participants are envisioning the fed funds rate to be 125 basis points lower by the year’s end.

A visual representation of interest rate expectations for September and the end of 2024, provided by K33 Research and CME, illustrates the dynamics at play.

“As inflation moderates and unemployment levels rise, the Federal Reserve might choose to implement rapid rate reductions to achieve a neutral rate,” suggested K33 analysts.

The financial landscape is poised for potential shifts based on the Federal Reserve’s decision, with investors closely monitoring the developments. The outcome of the central bank’s choice between a 25 or 50 basis point cut will likely have significant implications for various asset classes and market sentiments.

Stephen Alpher has contributed to the editing of this article.