With the FOMC meeting around the corner, could a rate cut provide the liquidity boost Bitcoin needs to rally, or will a smaller cut lead to market jitters?

All Eyes on FOMC Meeting

The Federal Open Market Committee is gearing up for another critical meeting on September 18, and all eyes are on the Federal Reserve’s next move.

The U.S. economy added 142,000 jobs in August, 28,000 more than in July, giving a slight boost to confidence. However, revisions slashed 89,000 jobs from the previous two months, signaling that the job market might not be as strong as it appeared.

Private payrolls saw a modest increase of 118,000, while the unemployment rate dipped slightly to 4.2%, driven mainly by the end of temporary layoffs.

On the inflation front, there’s a clearer yet somewhat confusing picture. Consumer Price Inflation in August fell to its lowest level since February 2021, hitting 2.5% on a 12-month basis, slightly below the forecast of 2.6%. However, core inflation—excluding the volatile food and energy sectors—rose 0.3% for the month, higher than expected.

This leaves the Fed in a tricky situation: while overall inflation is cooling, the sticky core inflation remains a thorn in their side, holding steady at 3.2%.

How Much Will the Fed Cut Rates?

Historically, rate cuts have boosted risk assets, and many are hoping for the same this time around, especially for crypto assets like Bitcoin. But how much the Fed decides to cut will significantly impact how the markets react.

Currently, traders are split between two possibilities: a 25 basis points (bps) cut or a more aggressive 50 bps cut.

According to recent data, there’s a 41% chance the Fed will opt for a 25 bps cut, bringing the rate down to the 5%-5.25% range. However, there’s also a 59% chance of a larger, 50 bps cut, which would bring rates to the 4.7%-5% range.

Analysts from 10x Research suggest that a 50 bps cut might actually spook markets instead of boosting them. Such a significant move could signal that the Fed is worried about the economy, making investors cautious about holding riskier assets like Bitcoin.

Ultimately, how the crypto market reacts will depend on what traders have already priced in. After the decision, all eyes will be on Fed Chair Jerome Powell’s comments as investors look for clues about what might come next.

What’s Next for Bitcoin?

As the crypto market awaits the Fed’s upcoming rate cut decision, Bitcoin has struggled to break through a key resistance level.

Since early August, Bitcoin has repeatedly failed to close above $62,000, and as of September 16, it’s down over 2%, hovering around $58,600.

According to renowned macro trader Craig Shapiro, this price action is closely tied to the market’s demand for liquidity, which he calls the “PALM,” or “perpetually accelerating liquidity machine.”

The Fed doesn’t want to start with a 50bps cut because frankly, at this point, the economy doesn’t need them to panic. The market wants them to start with 50 and go bigger and faster because the market acts like a petulant child in constant need of “moar” liquidity.

Shapiro explains that the market acts like a “petulant child,” selling off risk assets when it doesn’t get enough liquidity from the Fed.

Shapiro believes that the Fed needs to deliver a 50 basis point (bps) rate cut to satisfy the market’s liquidity cravings. He warns that a smaller 25 bps cut might disappoint investors, leading to further corrections in Bitcoin and other risk assets.

Essentially, the market is looking for the “Fed put strike price”—the level at which the Fed steps in to prevent a deeper downturn.

However, a larger 50 bps cut, while addressing the immediate liquidity needs, could signal deeper economic concerns. Historically, aggressive cuts have indicated that central banks are worried about slowing growth, which could trigger sell-offs rather than rallies.

This is the irony: while more liquidity can drive asset prices higher, too much too quickly may have the opposite effect.

There is hope for Bitcoin bulls, though. According to crypto analyst Miles Deutscher, Q4 has historically been the strongest quarter for both the S&P 500 and Bitcoin.

Q4 is also the strongest quarter for Bitcoin (by far). During this period, BTC averages a return of +88.84%. During the last 2 halving years (like this one), BTC rose by +58.17% (2016) and +168.02% (2020). Q3 is also its WORST period, which we have experienced this year.

Since 1945, the S&P 500 has gained an average of 3.8% in Q4 and risen 77% of the time. Bitcoin averaged a return of 88.84% in Q4, and in previous halving years like 2016 and 2020, it saw gains of 58.17% and 168.02%, respectively.

While Q3 has been Bitcoin’s worst-performing quarter historically, Q4 could offer a rebound—especially if the Fed’s rate cut aligns with expectations.

However, volatility remains a risk if the Fed’s action is smaller than expected or if macroeconomic conditions worsen.

What Lies Ahead

After the Fed’s decision on September 18, the real focus will be on Fed Chair Powell’s comments. His outlook on future rate cuts could either set the stage for a strong Q4 rally or keep markets on edge.

If Powell hints at more rate cuts ahead, Bitcoin and other risk assets might get the fuel they need to climb. But if he plays it cautious, we could see more market jitters.

At the same time, the U.S. presidential election race in November adds another layer of complexity.

Republican nominee Donald Trump has openly embraced crypto, launching his own project, World Liberty Financial, along with other crypto-focused initiatives. His clear stance could attract crypto supporters seeking a favorable regulatory environment.

On the other hand, Democratic nominee Vice President Kamala Harris has remained largely silent on crypto, and her views on the issue are unclear.

With both candidates representing starkly different approaches, the election could be a major turning point for the crypto market as investors weigh their options heading into 2025.

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