Fed rate cut: A double-edged sword for markets
When it comes to gold, he noted that “Gold has historically performed better in a falling rate environment than a rising rate environment.”
“From 1966 through 2020, physical gold returned 8.4% in a falling rate environment (Fed was pursuing an expansive monetary policy) and 5.5% in a rising rate environment (Fed was pursuing a restrictive monetary policy),” Johnson said.
“As for crypto, there is no rational way to determine the value of Bitcoin or any of the other various cryptocurrencies as one can’t apply the tools of traditional finance to arrive at the intrinsic value (or true value) of the supposed asset,” he added. “‘Investing’ in Bitcoin and other cryptocurrencies is pure, unadulterated speculation.”
“I put investing in parentheses because this is not investing, it is speculating,” Johnson noted. “Having said that, Bitcoin has recently traded like a high-risk asset. If that remains the case and we enter a risk-on environment, the speculation in Bitcoin and other cryptos could strengthen.”
Pullback warning
According to David Materazzi, CEO of Galileo FX, “A September rate cut could lead to a pullback, but markets are often unpredictable - what rises, may also fall.”
“If investors see the cut as a sign of weakness, stocks might fall sharply, but people have to remember that sharp does not mean permanent,” he noted. “Pullbacks are not disasters; they’re merely moments. Long-term investors understand that the market is a cycle. Staying on course is key.”
That said, Materazzi doesn’t think that the pullback will be the same for all asset classes.
“Not all sectors will suffer equally,” he said. “Growth stocks, especially tech, might fall harder due to their reliance on future earnings, while defensive stocks like utilities may stay steady. Bonds will likely gain from a rate cut as investors seek safer options.”
Like Johnson, Materazzi said that a rate cut would likely lead to a pullback for the USD.
“A rate cut typically weakens the dollar, making it less attractive to foreign investors,” he said. “But a weaker dollar is not always a weaker economy. While U.S. exporters benefit from a weaker dollar, importers feel the pinch. What’s more important is how companies handle the headwinds; those with solid foundations survive, even if the dollar falters.”
As for cryptos and gold, he said they “could rise after a rate cut.”
“A weaker dollar drives demand for alternatives like gold, often seen as a safe haven,” Materazzi said. “Gold attracts when uncertainty rises. Cryptos, though volatile, can gain speculative interest as investors seek higher returns. Both assets require caution: gold offers stability, while cryptos can swing widely. Investors must weigh risk and opportunity when the dollar shifts.”
Pricing in rate cuts
Matthew Jones, a precious metals analyst at Solomon Global, noted that “Almost every analyst/market commentator has already priced the Fed cutting rates at 100%, and it's important to understand how this will impact global markets.”
“Both fiscal and monetary policies are amended to change/modify, savers', investors' and market behavior,” he said.
For the stock market, Jones noted that “Lower interest rates generally benefit growth stocks, particularly in the technology sector. These companies often rely on cheap borrowing to finance their expansion, and lower rates reduce their cost of capital. As a result, tech stocks could see a significant boost.”
Regarding financials, he said, “Banks and other financial institutions could be negatively impacted as lower rates typically compress net interest margins, reducing profitability.”
“Commodities priced in dollars, like oil, could increase due to a weaker dollar,” Jones added. “However, the overall impact on oil could be mixed, depending on the broader economic outlook, which accompanies the rate cut.”
When it comes to gold, he thinks “gold prices could rise as a rate cut lowers the opportunity cost of holding non-yielding assets like gold. Additionally, if a rate cut weakens the dollar, gold (priced in dollars) becomes cheaper for foreign buyers.”
It's a similar story for crypto. “Lower interest rates could increase interest in cryptocurrencies as investors search for higher returns in alternative assets,” he said. “The weakening of the dollar could also drive interest in Bitcoin as a store of value.”
As for the bond market, Jones said, “A rate cut would likely lead to a decline in Treasury yields, especially on the shorter end of the curve. This could steepen the yield curve, benefiting longer-dated bonds. Investors might flock to Treasuries if they expect further rate cuts, pushing prices up and yields down.”
The biggest loser would be the USD, he suggested. “A rate cut could weaken the U.S. dollar, as lower interest rates make the currency less attractive to foreign investors. A weaker dollar could benefit U.S. exporters but might lead to higher import costs, impacting inflation.”
“In short, a Fed rate cut will likely boost growth stocks - particularly in tech - weaken the U.S. dollar, drive up bond prices and support commodities like gold,” he concluded. “The exact effects would depend on the broader economic context and the market's expectations surrounding the Fed's future monetary policy direction.”
According to Mike Marshall, Senior Researcher at Amberdata, the effects of a rate cut have been foreshadowed by the Japanese yen carry trade unwinding in early August.
“Typically, rate cuts are seen as bullish for markets, but in this case, a U.S. rate cut could make existing carry trades less attractive or profitable,” he said. “This could lead to an unwinding of positions, which we saw reflected in the nearly 10% market drop on August 5th, driven by de-risking and contagion.”
“Bitcoin, for instance, isn’t currently perceived as a safe haven compared to gold,” he noted. “During the August 5th event, gold’s volatility was around 1%, further showing this divergence. With the Bank of Japan expected to raise rates around September 20th, while the U.S. may cut rates, the unwinding of carry trades could accelerate, potentially affecting the $350 billion+ positioning. I think there is more to come.”
“In terms of Bitcoin, there’s a risk that the March gains could be erased, with sub-$50K levels, which were tested at the start of August, possibly coming into play again,” Marshall warned.
It’s the size of the cut that matters
According to Alice Liu, Research Lead at CoinMarketCap, the effect that a rate cut will have on markets will likely depend on the size of the rate cut.
“The size of the rate cut matters because it could lead to different market reactions,” she said. “A 25bps cut would likely boost markets, while a 50bps cut might signal recession concerns, potentially triggering a deeper correction in risk assets. If the rate cut is seen as a response to weakening economic conditions, it could raise concerns about future earnings growth, potentially leading to a short-term pullback in tech stocks.”
“The Nasdaq 100, which is heavily weighted toward tech, might experience some volatility, though long-term growth could remain positive if rate cuts are perceived as supportive,” Liu said. “On the other hand, a more aggressive rate cut could drive gold prices higher as investors seek safe-haven assets amid potential economic concerns. The crypto market would also likely benefit, though with potential short-term volatility.”
Another thing that could factor into the market response is the ‘September curse,’ she noted.
“Historically, September has seen average monthly returns of -4.45%, but this doesn’t mean we will certainly see a pullback in the market,” Liu said. “When the Fed decision comes on the 17/18th of September, it could send a positive signal across all major markets. BTC will likely attract institutional investments as part of a broader diversification strategy. Other narratives such as AI, RWA, and stablecoin projects are also likely to see the knock-on benefit.”
As for the USD, Liu aligned with the other analysts, saying, “A rate cut is generally expected to weaken the value of the U.S. dollar because lower interest rates make the dollar less attractive to investors seeking higher returns, reducing demand.”
“The DXY (U.S. Dollar Index) is also likely to decline as the relative value of the dollar tends to drop in value compared to other currencies when U.S. interest rates decrease,” she added. “Based on historical data, a weakening U.S. Dollar and a decreasing DXY often create upward pressure on Bitcoin's price. Investors tend to turn to Bitcoin as an alternative asset during times of dollar weakness, which can drive its value higher.”
“For example, during late 2020 and early 2021, when the DXY was dropping, Bitcoin saw significant price increases as investors moved away from the dollar amid inflation and economic uncertainty,” she highlighted. “A similar trend occurred in 2017 when Bitcoin experienced a strong rally as the DXY weakened.”
Ryan Lee, Chief Analyst at Bitget Research, also said its the size of the cut that matters.
“The extent of the Federal Reserve's rate cuts will directly impact the cryptocurrency market,” Lee said. “If the rate cuts are larger than expected, it could boost cryptocurrency prices, as loose monetary policy generally favors risk assets. However, if the rate cuts are smaller than expected, cryptocurrency prices could come under pressure.”
“Currently, the market believes there is nearly a 70% chance that the Federal Reserve will cut rates by 25 basis points in September and a 30% chance of a 50-basis-point cut,” he noted. “If the Federal Reserve cuts rates by more than 25 basis points in September, the U.S. dollar index is expected to decline, which could push cryptocurrency prices higher. However, if the rate cut is just as expected at 25 basis points, the positive impact on the cryptocurrency market might be reduced.”
Bearish on Bitcoin
Analysts at Bitfinex are bearish about the short-term outlook for Bitcoin following a rate cut.
“If we were to speculate, we would caution to expect a 15-20 percent decline when rates are cut this month, with a bottom of $40-50k for BTC,” they said in a note on Monday. “This is not an arbitrary number, but based on the fact that the cycle peak in terms of percentage return [is reduced] by around 60-70 percent each cycle, and the average bull market correction has reduced as well.”
“But this logic could be negated quite easily if macroeconomic conditions change,” they noted. “These are uncertain times for traders.”
And like Liu and Lee, Bitfinex analysts see a different reaction based on the size of the rate cut.
“A 25 bps rate cut would likely mark the beginning of a standard rate-cutting cycle, which could lead to long-term price appreciation for BTC as recession fears ease,” they said. “Such a move would signal the Fedʼs confidence in the economyʼs resilience, reducing the likelihood of a severe downturn. For BTC, this scenario could initiate a gradual uptrend after a sell-the-news event as the market anticipates more liquidity entering the system.”
“On the other hand, a more aggressive 50 bps cut could trigger an immediate spike in Bitcoinʼs price, potentially rising 58 percent due to heightened liquidity expectations, but we believe this can be short-lived,” they warned. “However, this scenario also comes with risks; a significant cut might increase recession concerns, leading to a temporary peak in the BTC price followed by a more substantial correction. This would mirror past instances where aggressive rate cuts initially boosted asset prices, only for the gains to be tempered by rising economic uncertainties.”
The analysts noted that “In 2019, an aggressive rate-cutting cycle led to BTC dropping by 50 percent from its cycle high before stabilizing.”
“In the current scenario, conditions differ,” they said. “Bitcoin has already undergone its halving event, reducing the pace at which new supply enters the market, and factors that were present in 2019-2020, such as the economic policies implemented to counter the global pandemic, are absent today.”
“If we apply a similar logic to the present, however, a 15-20 percent decline from Bitcoinʼs price at the time of a rate cut could be anticipated,” they reiterated. “Assuming the price of BTC at around $60,000 before interest rates are cut, this would place a potential bottom between the low $50,000s or mid $40,000 levels. However, itʼs important to recognize that these estimates are speculative and subject to significant variation based on evolving macroeconomic conditions.”
“Historically, September has been a volatile month for Bitcoin, with an average return of -4.78 percent and a typical peak-to-trough decline of around 24.6 percent,” Bitfinex analysts said. “This volatility, combined with the potential for a ‘sell-the-news’ reaction after a rate cut, could present both risks and opportunities for traders.”
“This historical price action for September also aligns with our view of a projected 20 percent drop in Bitcoin prices following a rate cut,” they said. “However, it’s worth noting that historical trends also show that when August ends in the red, September has occasionally defied expectations and delivered positive returns. This could provide a counterargument to the assumption that September will necessarily be a bearish month for Bitcoin.”
“Meanwhile, Bitcoin's increasing correlation with traditional risk assets like the S&P 500 suggests its price movements will remain closely tied to global macroeconomic conditions,” they added. “Actions by other major central banks, such as the ECB's potential pause in rate hikes amid slowing growth, the BOJ's cautious approach amidst a slowly recovering economy, and the PBOC's targeted liquidity measures to support China's slowing growth, are likely to have ripple effects across global markets and influence digital assets like Bitcoin.”
“The upcoming FOMC meeting and the potential for rate cuts are set to be pivotal events for Bitcoin and the broader cryptocurrency market,” the analysts concluded. “While historical data suggests caution in the short term – particularly given Bitcoinʼs historical volatility in September – the broader trends indicate a continued long-term bullish outlook for the digital asset.”
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