How Fed Rate Cut Expectations Pressure Crypto Markets

Many factors have a part in how crypto markets move. Trading volumes, news and regulatory conditions all play a role. Binance CEO Richard Teng explains his market outlook given potential US regulatory changes, “We expect to see development across all aspects. Crypto regulation saw great growth across the world in 2024 and we expect to see more in 2025. Given the recent U.S. presidential election and expected crypto regulation from its new government, we expect to see other countries follow the lead from the U.S. and enact more legislation across the world.”

Beyond regulatory changes, the U.S. Federal Reserve may have the next largest impact on markets. The Fed is responsible for setting interest rates for the nation, which impacts mortgages, credit cards, small business loans, and more. Even beyond its power to establish America’s monetary policy, though, the “Fed” sets a tone and a pace that the financial markets follow closely.

This is certainly true in the hair-trigger world of cryptocurrency, where price volatility is the norm and a single utterance from a Federal Reserve official can move markets immediately and dramatically. Hence, cryptocurrency market participants and onlookers should be able to connect the dots between what the market expects the Fed to do and how this could, for better or for worse, shape the near-term future of the crypto-sphere.

Rate Cut Paths Impact Risk-on Assets

The Federal Open Market Committee (FOMC), which is the Federal Reserve division that meets to periodically determine monetary policy, is scheduled to meet eight times this year. The next meeting will occur on January 28 to January 29, and FOMC meetings typically culminate with a decision about whether to hold the nation’s benchmark interest rate steady, hike it, or cut it.

Before looking toward the upcoming meeting, it’s important to understand what took place in past FOMC meetings. To sum it up simplistically, the Fed enacted a series of interest rate hikes from March 2022 to July 2023 in response to rising inflation. The inflation rate came down gradually, and Fed officials undoubtedly knew that keeping interest rates high for a prolonged period could lead to an economic downturn.

Surely, it’s not just a coincidence that “risk-on” assets, or financial assets that carry higher risk but can also yield higher returns, lost considerable value in 2022. After all, risk-tolerant investors weren’t in an exuberant mood when the Federal Reserve tightened the nation’s lending and borrowing conditions through a series of rate hikes.

Bitcoin, the granddaddy of all cryptocurrencies, tumbled from $40,000 to around $16,000 when the Fed enacted those rate hikes in 2022. Other risk-on assets, including some of the technology stocks in the NASDAQ 100 index, also lost considerable value during that time.

In 2023, however, traders of risk-on assets discerned that the Fed would soon pause its interest rate hikes. Indeed, the Federal Reserve kept rates steady for over a year and risk-on assets, such as the NASDAQ 100 index and cryptocurrencies like Bitcoin and Ethereum, recovered from their losses.

Then, the Federal Reserve implemented a “jumbo” 0.5% interest rate cut in September, followed by 0.25% rate cuts in the November and December FOMC meetings. Not coincidentally, that’s when Bitcoin rallied to an all-time high of around $100,000.

Forward-looking Markets Can Put Pressure on Crypto

The financial markets, and certainly the cryptocurrency market, are always forward-looking. Crypto traders are constantly buying and selling based on a multitude of factors, including what they think the Federal Reserve will do for the rest of 2025.

Consequently, even though the Fed make a seemingly risk-on move when it cut interest rates by 0.25% in December, the prices of Bitcoin and many other cryptocurrencies pulled back in January. That’s because the forward-looking market didn’t get a risk-on vibe during the December FOMC meeting.

From September through November, cryptocurrency investors largely assumed that the Fed would enact four 0.25% interest rate cuts in 2025. However, in the December FOMC meeting, the Fed signaled that it’s likely to only cut interest rates twice this year.

On top of that, the Federal Reserve hinted that it will continue its policy of quantitative tightening (QT), in which the central bank will further tighten monetary conditions by selling assets (mostly government bonds). This is decidedly risk-off and put negative pressure on the crypto market.

Not only that, but the nonfarm payrolls report for December indicated many more job additions during the month than expected. When the economy adds a large number of jobs, this tends to be inflationary – and this could make the Federal Reserve reluctant to cut interest rates soon.

Don’t Get Spooked by Rate Cut Expectations

In light of the aforementioned risk-off factors, strategists with Goldman Sachs and Bank of America don’t envision the Federal Reserve cutting interest rates many times, if at all, in 2025. Meanwhile, some cryptocurrency traders are also in a skittish mood lately, as evidenced by a mid-January Bitcoin price pullback to around $90,000.

On the other hand, even as ever-changing rate cut expectations can put pressure on the crypto markets, people’s fears often turn out to be overblown. When the reality turns out to be not nearly as scary as the expectations, risk-on assets might embark on a swift “relief rally.”

There are no guarantees, but the year is still young and there’s plenty of time for the risk-on versus risk-off narrative to shift in 2025. Federal Reserve policy has already pivoted more than once during the past couple of years – and this year, the pressure on crypto could soon be to the upside.