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The Federal Reserve’s latest decision to lower its policy rate to the 4.25-4.5% range has sent shockwaves through financial markets, including a significant impact on the crypto sector.
"I think we're in a good place, but I think from here it's a new phase and we're going to be cautious about further cuts," Fed Chair Jerome Powell said.
While the rate cut was widely anticipated, Powell’s cautionary tone about the pace of future cuts amid persistently high inflation triggered sharp declines across equities, bonds, and digital assets. The S&P500 closed the day 2.95% lower at 5,872.16 (−178.45), marking its worst single-day performance since 2020, and it's worst "Fed day" since 2001.
Bitcoin, which has often been touted as a hedge against inflation, fell sharply in the wake of the Fed’s announcement, dropping below $100,000 for the first time in weeks. The cryptocurrency sank by over 5%, though it has since pared some losses to sit 3.21% lower in the last 24 hours, marking an 8% decline from recent highs. Altcoins fared even worse, with Ethereum and Solana losing over 4%, and Dogecoin down 7%. From their respective highs, BTC, ETH, SOL, XRP, DOGE and HYPE are down -8%, -11%, -23%, -13%, -23% and -17%.
Overall, the global crypto market cap fell to as low as $3.42 trillion, a 7.18% decline in 24 hours, per Coinmarketcap data, but it now stands at $3.51 trillion, a 3.89% decline in 24 hours.
In total, over $709 million in liquidations occurred within the last 24 hours, with $612 million of those being long positions. The sharp sell-off underscores the fragile sentiment in the crypto market, which has been grappling with macroeconomic uncertainty and regulatory pressures.
Fed’s Message and Implications
The Fed’s dot plot, which maps policymakers’ future rate expectations, revealed a reduced forecast for rate cuts next year, down from four to just two. Powell emphasized that further rate adjustments will depend on measurable progress in curbing inflation, which is expected to remain above the 2% target through 2025, Reuters reported.
The Fed began its easing cycle with a 50 basis points (bps) cut in September, and followed up with a 25 bps cut last month. The Fed chair noted that inflation had improved from its 2022 peak but warned that core inflation, particularly shelter costs, remains sticky. "The extent and timing of additional adjustments to the target range will depend on incoming data, the evolving outlook, and the balance of risks," Powell stated, signaling a cautious path forward.
Additionally, Powell dismissed any immediate changes to laws prohibiting the Federal Reserve from holding Bitcoin, reinforcing the central bank’s focus on traditional monetary policy tools.
Wider Economic and Political Context
The incoming Trump administration adds a layer of unpredictability to the economic landscape, with promises of tax cuts, higher tariffs, and tighter immigration policies potentially fueling inflationary pressures. While the Fed has begun incorporating preliminary assumptions about these policies into its projections, Powell cautioned that their full impact remains highly uncertain.
Ashrith Rao
For the crypto market, the message is clear: tighter monetary policy for longer poses a significant headwind for digital assets, particularly speculative altcoins.
With inflation still above target and rate cuts now expected to proceed more slowly, the crypto market faces heightened volatility in the near term. Inflation data on Friday and the Fed’s January meeting will provide further clues on monetary policy direction.
