The cryptocurrency market faced a turbulent day as Bitcoin (BTC) plunged to $101,000 following the Federal Reserve’s latest monetary policy announcement. Despite a widely anticipated 25 basis point rate cut, Federal Reserve Chair Jerome Powell’s hawkish tone during the subsequent press conference sent shockwaves through the market, causing significant declines in major altcoins such as XRP, Cardano (ADA), and Litecoin (LTC).
Fed’s Rate Cut and Economic Projections
On December 18, 2024, the Federal Reserve reduced its benchmark fed funds rate by 25 basis points to a range of 4.25% to 4.50%. This move marks the third consecutive rate cut this year, totaling a reduction of 100 basis points since September. While the rate cut was expected, market participants turned their attention to the Fed’s policy statement and economic projections for insights into future monetary actions.
The “dot plot” released by the Fed indicates a projected fed funds rate of 3.9% by the end of 2025, suggesting fewer rate cuts next year compared to previous projections. Additionally, the Fed’s Personal Consumption Expenditures (PCE) inflation expectation for 2025 rose to 2.5%, reflecting concerns over persistent inflation.
Market Reaction
Bitcoin, already trading lower in the session, fell sharply from $104,000 to around $101,000 following Powell’s press conference, marking a nearly 5% decline within 24 hours. Altcoins experienced even steeper losses, with XRP, Cardano’s ADA, and Litecoin’s LTC dropping around 10%. The S&P 500 index also hit a session low amid the uncertainty.
During the press conference, Powell highlighted the Fed’s cautious approach, citing hotter inflation readings in recent months and elevated inflation expectations for next year as reasons for the slower pace of rate cuts. “We are closer to the neutral rate, which is another reason for cautious further moves,” Powell stated.
Strategic Bitcoin Reserve?
In an intriguing moment during the press conference, Powell addressed a question about the possibility of the government establishing a strategic bitcoin reserve under Donald Trump’s presidency. Powell clarified that the Fed is “not allowed to own bitcoin” per the Federal Reserve Act and expressed no interest in pursuing a change in this policy.
Expert Insights
Andre Dragosch, European Head of Research at Bitwise, provided additional context on the market’s reaction. “The biggest headache for the Fed right now is the tightening financial conditions despite the rate cuts. Long bond yields and mortgage rates have increased, and the dollar has appreciated, implying a tightening in financial conditions,” Dragosch explained.
Dragosch also pointed out the macroeconomic risks for bitcoin, noting that a continued appreciation of the US dollar could lead to a contraction in the global money supply, which tends to negatively impact bitcoin and other crypto assets. “Tightening liquidity and a strong dollar pose significant risks for BTC. However, on-chain factors for BTC remain supportive, particularly the ongoing decline in exchange balances, suggesting a supply deficit,” he added.
Conclusion
The Federal Reserve’s latest policy announcement and Powell’s hawkish remarks have undeniably rattled the cryptocurrency market. As Bitcoin and other major cryptocurrencies grapple with these developments, investors will be closely monitoring the Fed’s actions and economic indicators for further clues on the market’s direction. The interplay between tightening financial conditions and supportive on-chain factors will likely shape the trajectory of Bitcoin and the broader crypto market in the coming months.
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