A potential 50 basis point (bps) interest rate cut by the U.S. Federal Reserve (FED) next week could spark concern among risk assets, including Bitcoin (BTC), according to a report from 10X Research. The Fed is widely expected to begin a rate-cutting cycle, and the first reduction is anticipated during the Federal Open Market Committee (FOMC) meeting on September 18.
While lower interest rates typically stimulate markets, the unusually large cut could signal heightened economic risks, causing investors to reassess their exposure to risk assets such as cryptocurrencies and stocks.
“While a 50 basis point cut by the Fed might signal deeper concerns to the markets, the Fed’s primary focus will be mitigating economic risks rather than managing market reactions,” said Markus Thielen, founder of 10X Research, in a note to clients on Monday. Thielen accurately predicted Bitcoin’s first-quarter rally to $70,000 earlier this year.
The Fed generally opts for 25 bps rate adjustments, but larger moves are chosen when there is urgency, as seen during the 2022 tightening cycle when inflation control was paramount.
If the Fed opts for a 50 bps cut, it may indicate the central bank is worried about a potential economic slowdown. This could lead to a pullback in risk assets, with investors becoming more cautious.
At the time of writing, the Chicago Mercantile Exchange’s (CME) FedWatch tool indicated a nearly 30% probability that the Fed will cut rates by 50 basis points next week, reducing the rate to the 4.75%-5% range.
“The probability of a 50 basis point cut is only 29%, contrasting our view and the prevailing consensus,” Thielen added. “The Fed may be behind the curve, having missed signs of labor market weakness after being caught off guard in July.”
Traditional market experts echo Thielen’s concerns. Macro trader Craig Shapiro noted that although markets addicted to liquidity might favor a 50 bps cut, the Fed likely wants to avoid creating panic, given that the current economic data still shows slow growth.
“The economy doesn’t need the Fed to panic with a 50bps cut right now,” Shapiro said on X. He added that markets could correct lower until the Fed is forced to deliver bigger rate reductions to satisfy investors.
Historically, the start of a rate-cutting cycle has not always resulted in an immediate boost to asset prices, raising questions about whether the upcoming cut is already priced into Bitcoin’s current value.
BTC has seen a consistent uptrend since January 2023, largely driven by expectations of Fed easing. However, whether this optimism will hold in the face of larger-than-expected cuts remains to be seen.
