A 0.50% Fed Rate Cut Could Raise Alarm for Bitcoin, 10X Research Warns

As a seasoned researcher with over two decades of experience navigating financial markets, I can’t help but see the looming Fed rate cut as a double-edged sword. On one hand, it’s an acknowledgment that the economy needs support, yet on the other, it might signal deeper concerns about the economic outlook.

Based on the latest U.S. employment data released on Friday, it appears that the Federal Reserve (Fed) could initiate a reduction in interest rates as early as next week. This potential adjustment is suggested by the data presented.

10x Research predicts that the anticipated period of increased liquidity might end on a downbeat note for risky assets such as stocks and cryptocurrencies if the Federal Reserve reduces interest rates by 50 basis points (bps) on September 18th.

Central banks often adjust interest rates in increments called “basis points,” which represent one one-hundredth of a percentage point. Typical changes are 25 basis points. However, larger moves may be made in more critical situations, demonstrating a heightened sense of urgency. For example, during the 2022 tightening cycle, the Fed implemented several increases of 50 and 75 basis points, underscoring their eagerness to curb inflation and leading to increased caution among financial market participants.

A reduction of 0.5 percentage points by the Fed could indicate more serious worries for the markets, but their main goal is addressing economic threats rather than controlling market responses,” Markus Thielen, from 10x Research, shared with clients on Monday, having accurately forecasted Bitcoin’s surge to $70,000 in the first quarter.

Currently, CME’s FedWatch tool indicates a roughly 30% chance that the Federal Reserve might lower interest rates by 0.5 percentage points, bringing the range to approximately 4.75% – 5%, within the upcoming week.

Thielen stated that there’s a relatively small chance (29%) for a 0.5% decrease in interest rates, which contradicts current expectations. Moreover, there’s growing agreement among analysts that the Federal Reserve has fallen behind, not recognizing early signs of labor market vulnerability after being taken by surprise in July.

Thielen’s view is consistent with the consensus among traditional market experts.

In simpler terms, according to macro trader Craig Shapiro, the Federal Reserve is hesitant to initiate a half-percentage point interest rate reduction right now because, quite frankly, the economy isn’t in a state that requires them to induce panic.

Shapiro explained that market sectors heavily dependent on liquidity would advocate for an initial 50 basis point reduction in interest rates by the Federal Reserve, and these markets would continue to adjust downward until they perceived larger cuts from the central bank.

Shapiro stated, “We’ve returned to this area, and it appears that risky investments will experience a correction until the Federal Reserve yields and meets market demands. However, determining the right ‘Fed put’ strike price is challenging at this point due to the economy’s current state and the fact that risk asset prices (like stocks and credit spreads) remain high while economic data is still growing gradually. I have concerns that the appropriate levels could be much lower.

Historical data indicates that starting a rate-cutting cycle, regardless of the initial magnitude of the reduction, may not consistently lead to an increase in asset prices.

It’s important to recognize that the anticipated Federal Reserve easing may have played a significant role in Bitcoin’s upward trend from $20,000 in January 2023, leading some to wonder if the potential rate reduction has already been factored into its current price.