What to watch for heading into the next Fed rate decision

While both traditional and crypto markets are expected to react to the Federal Reserve’s anticipated rate cut Wednesday, the impact is likely to hinge on the size of the reduction.

Though a rate cut is all but guaranteed, markets will be tuning in to Fed Chair Jerome Powell’s Wednesday afternoon press conference to get details about the decision.

As of 11 am ET Tuesday, CME Group’s FedWatch tool showed a 62% probability of a 50 basis point rate cut and a 38% probability of a 25bps reduction.

Read more: Powell confirms September rate cut, stocks and cryptos rally

Some industry analysts and executives have noted that while the market would likely view a 25bps cut as a normal measure — and potentially react positively — a 50bps cut could spark investor fears of a recession and potentially increase volatility.

This concern about a larger rate cut weighing heavily on risk assets is contrary to history showing that more rate cuts fare well for such assets, LMAX Group market strategist Joel Kruger told Blockworks.     

“However, we believe there is a strong chance that in the event we do see 50 basis points, investors will have had more time to feel better about things and will once again welcome the accommodation,” he added.

Matt Lason, chief investment officer of crypto hedge fund Globe 3 Capital, said he’s expecting the Fed to cut by 50bps on Wednesday. Many Fed inflation metrics have been met, he told Blockworks, adding that jobs and other macro data have “softened.” 

“This will be very good for crypto and the markets overall,” he argued. “If the Fed only lowers 25bps, it might disappoint some temporarily. But in either scenario we are still very bullish on crypto in the long term.”

Then there were Democratic Sens. Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper, who made the request for a more aggressive 75bps cut in a Monday letter to Powell. 

The trio cited the Fed’s confidence in inflation moving toward its 2% target and data indicating slower job growth. 

They noted the Fed should “front-load rate cuts to avoid sliding towards a potential crisis,” adding that high interest rates might even be making worse remaining drivers of inflation, such as housing costs.

Once we learn which route the Fed chooses to take Wednesday, Lawant noted “the more critical question” becomes how large and how long the rate-cutting cycle will be. 

Susannah Streeter, head of money and markets at financial services firm Hargreaves Lansdown, said in a statement she’s expecting “a quick succession of cuts.”  

She added: “Even if a smaller rate cut is delivered, it’ll raise expectations for a more aggressive loosening of policy in November and December, with 100bps of rate reductions by the end of the year priced in by markets.” 

This expected cut is happening as bitcoin’s link to traditional assets has recently increased, FalconX research head David Lawant pointed out in an X post last week. 

Bitcoin rose above $60,000 this weekend before dipping following a Sunday report of a second apparent assassination attempt on Donald Trump. BTC’s price hovered around $60,350 at 11 am ET on Tuesday — 3.7% higher than 24 hours prior. 

Kruger called the early-week price setback “somewhat perplexing” given the seeming lack of “material fundamental catalysts within crypto or traditional financial markets to reconcile the activity.”

Bitcoin’s price has remained in somewhat of a consolidation phase in recent weeks. While traders brace for the potential positive or negative impact these rate changes have on traditional and crypto markets in the short-term, various segment observers have continued to float lofty year-end price forecasts for BTC — particularly if certain things fall into place.

Read more: Price predictions proliferate after volatile week

The wait-and-see game goes beyond Fed rate decisions, as markets appear to be awaiting whether Kamala Harris or Trump (a more vocal crypto supporter so far) will win the November election. 

Despite the unknowns, Lason said the fundamental longer-term catalysts for bitcoin remain intact, noting the ongoing institutional demand for the asset, and the bitcoin ETFs.  

“With the US national debt crossing $35 trillion and the debasement of fiat currencies across the globe, we expect bitcoin’s upward trajectory to continue,” he added.

Still, the market remains “well aware of seasonality trends that are keeping traders cautious” for at least another couple weeks, Kruger noted. September is a historically bad month for bitcoin and the stock market.    

The LMAX market strategist added: “The silver lining here, especially for crypto, is that October and November are the strongest months of the year.”

A modified version of this article first appeared in yesterday’s On the Margin newsletter. Subscribe here so you don’t miss tomorrow’s edition.

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.