An aggressive Fed rate cut may signal economic worry, not reassurance, weighing over risk assets, including bitcoin, according to 10x Research.
Traders currently see a less than 30% chance of a 50 basis point rate cut next week.
Friday’s U.S. jobs report has seemingly set the stage for the Federal Reserve (Fed) to start cutting interest rates, with the first move likely to happen next week.
The supposedly bullish liquidity easing cycle may klick off on a sour note for risk assets, including cryptocurrencies, if the Fed cuts rates by 50 basis points (bps) on Sept. 18, according to 10x Research.
Rate moves are expressed in “basis points (bps),” equal to 1/100 of a percentage point and central banks, including the Fed, typically opt for 25 basis point interest rate changes. However, more significant moves are occasionally chosen, indicating a sense of urgency. For instance, the Fed delivered multiple 50 bps and 75 bps hikes during the 2022 tightening cycle, signaling an urgency to control inflation and causing risk aversion in financial markets.
A 50 basis point rate cut next week might imply heightened economic concerns or a sense of falling behind the curve in combating the impending economic slowdown, thus leading investors to scale back exposure to risk assets like bitcoin (BTC) 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,” Markus Thielen, founder of 10x Research, said in a note to clients Monday, having correctly predicted BTC’s first quarter rally to $70,000.
At press time, Chicago Mercantile Exchange’s (CME) FedWatch tool showed almost 30% probability that the Fed will cut rates by 50 basis points to the 4.75%-5% range next week.
“The probability of a 50 basis point cut is only 29%, contrasting our view and the prevailing consensus. The chorus is growing louder that the Fed is behind the curve, having missed signs of labor market weakness after being caught off guard in July,” Thielen added.
Thielen’s view is consistent with the consensus among traditional market experts.
“The Fed doesn’t want to start with a 50bps cut because frankly, at this point, the economy doesn’t need them to panic,” macro trader Craig Shapiro said on X.
Shapiro detailed that liquidity-addicted markets will want the Fed to start with a 50 bps rate cut and will correct lower until the central bank opts for bigger reductions.
“We are back in this zone. Risk assets will correct until the Fed capitulates and gives it what it wants. We need to find the Fed put strike price, but given where the economy is now and with risk asset prices (stocks, credit spreads, etc) still so elevated while the economic data is still slowly growing, I fear the levels are significantly lower,” Shapiro added.
Past data show the start of the rate-cutting cycle, irrespective of the size of the first move, does not always have a stimulative effect on asset prices.
Note that the expected Fed easing has been one of the key factors behind BTC’s uptrend from $20,000 in January 2023, which raises the question of whether the rate cut is already priced in.