Key Points:
The Federal Reserve's unexpected interest rate cut may reduce the attractiveness of fixed income, pushing some capital towards assets like Bitcoin.
Bitcoin benefits from loose monetary policy, as excess liquidity and strong macro conditions enhance risk appetite.
If the Federal Reserve unexpectedly cuts rates below the current 4% level, Bitcoin (BTC) could rise to over $140,000. Although most market participants do not expect today's FOMC policy meeting to change interest rates, even a small rate cut could reduce fixed income returns, prompting traders to shift towards higher-yield alternatives and increasing demand for risk assets.
According to the CME FedWatch tool, which calculates implied rates based on U.S. Treasury pricing, the probability of maintaining the current level is 97%. What makes the situation unusual is that macroeconomic data has been strong leading up to the meeting—inflation has cooled, recession risks have diminished, and growth remains stable.
According to preliminary estimates from the Bureau of Economic Analysis, the U.S. economy grew at an annualized rate of 3% in the second quarter. This growth was achieved following a surge in imports before President Trump's global trade war. Market sentiment has shifted dramatically: on the Polymarket prediction platform, the probability of a U.S. economic recession in 2025 has dropped from a peak of 66% in May to 17%.
Inflation pressures have also eased. The Producer Price Index (PPI) for June, released on July 16, rose only 2.3% year-on-year, the lowest reading since September 2024. CNBC reported that the impact of U.S. import tariffs on the economy and consumer prices is only marginal. Nevertheless, Federal Reserve officials remain vigilant about potential downstream effects of trade policy.
President Trump has repeatedly criticized the Federal Reserve's monetary stance, urging Chairman Jerome Powell to cut rates immediately. "There is no inflation! Let people buy homes and refinance!" the president urged. However, according to Yahoo Finance, there are no signs that Powell plans to change course this week.
For Bitcoin investors, loose monetary policy is generally favorable, although it does not solely depend on the Federal Reserve's benchmark interest rate. Risk assets are strongly influenced by the growth of the money supply, particularly M2, which includes cash, savings accounts, certificates of deposit, and money market funds. The expansion of M2 is also affected by the U.S. Treasury's debt issuance decisions.
A higher liquidity environment tends to benefit the S&P 500 index and Bitcoin, although this effect is usually gradual. A rate cut from 4% to 3.75% could push investors away from the $254 trillion government and corporate bond market. Even if inflation remains below 2.5%, the yield advantage of fixed income would diminish, making risk assets more attractive.
Lower interest rates also reduce borrowing costs for businesses and households, encouraging greater leverage over time. This increased liquidity drives economic activity, thereby enhancing investors' willingness to take risks. Historically, Bitcoin has performed well during such phases when more capital is available and labor market conditions remain stable.
At first glance, a Bitcoin price of $140,000 seems ambitious, requiring a 19% increase from the current $117,600. However, such a move would imply a market capitalization of $2.78 trillion, still 87% lower than gold's $22.5 trillion valuation. In comparison, Nvidia (NVDA), currently the world's most valuable company, has a market capitalization of $4.36 trillion.
While the likelihood of a rate cut this Wednesday is low, if it occurs, Bitcoin would be one of the biggest beneficiaries. The S&P 500 index is already valued at $56.4 trillion, leaving much less room for investors to shift out of fixed income.
Related: Ethereum (ETH) 2035: What the Next Decade Might Look Like
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