What to Know:
- The U.S. unemployment data released on Thursday showed a deceleration.
- Now, the market is pricing in a 99.7% probability of a Federal Reserve interest rate cut.
- In case of a Fed rate cut, Bitcoin and other cryptocurrencies could heavily benefit.
Futures market data show that the possibility of a Federal Reserve interest rate cut in September is now almost a certainty, following the latest jobs report that revealed a significant deceleration of the U.S. labor market. The news has sparked hope among digital asset holders, and Bitcoin (BTC) and other leading cryptocurrencies are recording modest profits.
The Expectation of a Fed Rate Cut Hits the Roof
Traders are already placing a 99.7% probability that the Federal Reserve will lower its benchmark policy rate at its next meeting, according to CME FedWatch tool. They expect a 25-basis-point (bps) reduction in September with the next Federal Open Market Committee (FOMC) meeting scheduled for September 16-17.
The argument in favor of a cut became even stronger after new economic data showed that nonfarm payroll expansion almost stalled during the month of August with only 22,000 new jobs being generated. That number was one of the lowest monthly performances since the pandemic recovery phase and was far below the Wall Street consensus estimate of 75,000.
Unemployment also sneaked up, to 4.3%, compared to 4.2% the previous month. Economists see this change as a signal that the labor market is losing steam, which further puts pressure on the Fed to reduce the cost of borrowing money to encourage a more severe economic slump.
Bitcoin Price Surges as Crypto Investors React
The markets responded rapidly to the report. The largest cryptocurrency by market value, Bitcoin, shot up in the hours following the release by between $111,000 and $113,000, a growth of slightly over 2% on the day. Other top tokens also wrote off, but the increases were not as vigorous as Bitcoin’s; however, BTC also lost steam and fell to the $110,000 level.
Nonetheless, to crypto traders, a decrease in the rate is more than just a short-term price action. Digital assets are traditionally considered an alternative investment that flourishes when the real returns on traditional financial assets fall. Reduced interest rates decrease the attractiveness of fixed income investments like the U.S. Treasuries and force investors to find returns in other places, including riskier investment options like cryptocurrencies.
How will a Fed Rate Cut Affect Crypto?
The connection between digital assets and monetary policy has grown stronger over the last years. When central banks reduce rates, the rate of borrowing becomes cheaper, and liquidity is more likely to move freely in the financial market. Such an environment traditionally favors speculative assets by lowering access to capital and lowering the opportunity cost of holding non-yielding investments such as Bitcoin.
Also, decreased monetary conditions can undermine the U.S. dollar. As most exchanges use dollars to convert cryptocurrencies, a softer greenback tends to make them more appealing to international consumers, which strengthens the demand.
A Fed cut is also psychologically charged. It sends investors a message that the policymakers are ready to take preemptive measures to counteract decelerating growth and can rebuild investor confidence in the risk markets. As a high-beta asset, crypto tends to respond rapidly to this kind of sentiment.
Looking Ahead
Though there is virtual unanimity that a 25-basis-point reduction will be the outcome, crypto traders are celebrating, but analysts warn of excessive optimism. The Fed is still alert to the risks of inflation, and a shock in future consumer price data may cool the process of easy money. In addition, the performance of the broader economy will still determine the sustainability of any crypto rally.
So far, however, the sudden spike in the upward direction of Bitcoin reflects the sensitivity of the digital asset market to fluctuations in the expectation of monetary policy. As the rate cuts are virtually locked in, investors are once again questioning whether this may possibly mark the beginning of the longer-lasting phase of cryptocurrency recoveries.
