How could the Fed meeting affect Bitcoin?

• The market is pricing in a 67% chance of a 50bps discount.

• Rate cuts have historically benefited Bitcoin’s price.

• Could a 50 bps revive recession fears?

• A favorable reaction could see Bitcoin bulls test the 60k-61k zone.

The Federal Reserve’s two-day policy meeting begins today and will conclude on Wednesday. The US central bank is set to start cutting rates, but the big question is how much and what that could mean for Bitcoin.

The market has raised expectations that the Fed will kick off this rate-cutting cycle with an outsized cut. According to the Fed funds, the market is pricing in an interest rate cut and is pricing in a 67% probability of a 50 basis point rate cut, up significantly from 35% just a week ago.

There are pros and cons to an interest rate cut of 25 or 50 basis points. While inflation cooled, the hotter-than-expected monthly core inflation print served as a reminder that inflation remains sticky, favoring a 25 basis point cut. Meanwhile, a cooling labor market and signs that the economy is slowing faster than expected support a broader Fed move.

Given the pricing uncertainty ahead of the decision, whether the Fed decides to cut by 25 or 50 basis points, the market is likely to see increased volatility.

How has Bitcoin reacted to previous rate cuts?

Historically, Bitcoin has performed well following Fed interest rate cuts. In March 2020, Bitcoin recovered following the Fed’s rate cuts in response to the pandemic economic shock.

When the Federal Reserve cuts interest rates, it increases liquidity, which is often beneficial for risk assets like Bitcoin or stocks. Therefore, the start of a rate cut cycle is often considered bullish for crypto.

However, there is a possibility that a 50 basis point rate cut from the Fed could spook the market. Concerns of a hard landing came after July’s weaker-than-expected non-farm payrolls report sent Bitcoin below 50k. If the Fed opts for a wide hike, it risks sending the message that the Fed is behind the curve and that a 50 basis point hike is needed to try to avoid a hard landing. Such a move could reignite lingering recession fears, negatively impacting risk assets and the price of Bitcoin.

This is not our base case, given that Bitcoin price has rebounded from the September low of 52.5k, in line with growing expectations of a 50 basis point decline. With that in mind, a huge cut, if accompanied by calming words from the Fed, could support a bigger move for the digital asset.

Where next for Bitcoin?

On the 4-hour chart, Bitcoin is trading in a symmetrical triangle. A favorable reaction to the Fed’s rate decision could cause buyers to break out above the 60-61k area to fuel a higher move towards 65k.

If the Fed’s move is concerned about the fuel recession, a move lower toward 53.7, rising trendline support, could be on the cards.