Sophia’s Thoughts on the Upcoming Rate Cuts
We examined the potential impacts of the upcoming Federal Reserve rate cuts on both the crypto and stock markets. How will it play out?
These are Sophia's Thoughts:
The crypto community is on edge, with concerns that a deeper-than-expected Fed rate cut could signal a looming recession.
Analysts are divided, with some warning of a sharp drop in Bitcoin prices if the Fed cuts rates aggressively, while others see September as a buying opportunity ahead of historically stronger months.
We believe the Fed's rate cuts could influence the market going into the election and beyond, potentially boosting the Biden-Harris administration if markets react positively, while a downturn might bolster Trump's economic reform message and pro-crypto stance.
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🚀 Last week’s market performance
The market sold off this week, losing 6.2%. Bitcoin (BTC) dropped slightly less, falling 5.9% over the week. For the second week in a row, the worst performing coin was Zcash (ZEC) which lost 19.5%. The best performing was Helium (HNT), which has been surging upon optimism surrounding rising network users and Helium hotspots.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
😱 Recession fears
As we enter September, the crypto community is buzzing with anticipation and speculation about the potential impact of the U.S. Federal Reserve's expected interest rate cuts. The depth of the rate cut plays a large role in how both markets will respond. The uncertainty around how deep the rate cuts will be has fueled fears of an impending recession.
A moderate 25 basis point cut might be seen as a positive signal, suggesting confidence in the economy’s resilience and potentially leading to a long-term price appreciation for the crypto market and speculative assets. However, a more aggressive 50 basis point cut could signal severe economic concerns, followed by a more substantial downturn as recession fears intensify.
September is typically the weakest month for Bitcoin, with an average monthly return since 2018 of -6.6%. While September's performance is often negative, the subsequent months following tend to be strong.
🗣️What are people saying?
The crypto community is abuzz with speculation as the September Federal Open Market Committee (FOMC) meeting approaches. There's a strong likelihood that the U.S. Federal Reserve will cut the federal funds rate, with CME’s Fedwatch tool giving a 61% probability to a 25 basis point cut and a 39% probability to a 50 basis point cut. The potential impact of this move is causing a stir. Garry Evans, BCA Research’s chief asset allocation strategist, has voiced concerns that while a rate cut might be on the cards, it won't necessarily stave off a recession. Evans emphasized that despite market optimism about a soft landing, the indicators he’s observing, such as the Sahm Rule, are signaling an economic downturn.
This sentiment is echoed by notable figures like Robert Kiyosaki and Peter Schiff, who have issued stark warnings about the U.S. economy's future. Kiyosaki cautioned about the broader state of the economy, while Schiff predicted a looming crisis for the U.S. dollar and a potential economic collapse. Despite these warnings, not everyone is convinced a recession is imminent. Polymarket bettors, for instance, are placing just a 10% chance on the U.S. entering a recession this year, showing skepticism toward the more pessimistic forecasts.
Analysts at Bitfinex have also weighed in, warning that an aggressive rate cut of 50 basis points, could lead to a sharp 20% drop in Bitcoin prices. They argue that such a significant cut might signal deep economic concerns, reinforcing recession fears and triggering a substantial market downturn.
On a more optimistic note, K33 Research suggests that while September is typically a weak month for Bitcoin, it could also present a valuable buying opportunity. They point out that the period from October to April has historically been bullish for Bitcoin. Accumulating Bitcoin during a potential September dip could position investors for strong returns as the market moves into these traditionally stronger months.
🇺🇸 The US election
We believe that there is another narrative at play that goes beyond recession fears. If the Fed cuts rates and the stock market responds positively, it could reflect well on the Biden-Harris administration heading into the 2024 election. A strong economy and stock market are favorable for incumbents, making it harder for challengers to argue for change. Trump’s campaign has largely been centered around fixing inflation and lowering interest rates. But if the Fed is already cutting rates and inflation appears under control, the urgency for Trump’s economic reform message could lose steam.
Trump has spoken publicly on his pro-crypto stance, with favorable policies for the crypto asset class as a whole. So, a reduced likelihood of Trump’s election could play a role in the crypto market's performance. The market's reaction to the Fed's upcoming actions could impact the financial landscape going into the 2024 elections and beyond.
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