The latest CPI data shows that consumer prices rose by 0.4% month-on-month in August, up from 0.2% in July. Meanwhile, the number of initial jobless claims rose to 263,000, the highest in nearly four years, exceeding the revised figure of 236,000 from the previous week. Weak employment market data overshadowed persistent inflation, leading investors to expect that the Federal Reserve will implement a rate cut at its policy meeting this Wednesday (September 17).
According to the CME FedWatch tool, investors have set the probability of a Federal Reserve rate cut at 96.2%.
Generally, the Federal Reserve must weigh the dual goals of "full employment" and "price stability" in its decision-making. However, with a slowing job market and persistent prices coexisting, the Federal Reserve faces a complex choice. Former Federal Reserve Council economist Claudia Sahm stated, "This is the most difficult situation for the Federal Reserve. They are cutting rates not because of good inflation data, but because of weakness in the job market."
RSM Chief Economist Joe Brusuelas also noted that stubborn inflation may lead the Federal Reserve to adopt a more cautious stance after September, pointing out, "While market trading may reflect a rate cut in advance, data suggests that three rate cuts before the end of the year are not a foregone conclusion."
As economic data presents conflicting signals, political intervention has also become a significant reason for the heightened attention on this rate cut. Last Sunday, Trump again publicly pressured the Federal Reserve, stating in an interview with reporters that "now is the best time for a rate cut," and he believes "the Federal Reserve will cut rates significantly." Meanwhile, the Trump administration has once again urged the U.S. Court of Appeals to approve the dismissal of Federal Reserve Governor Lisa Cook.
If a rate cut occurs, the market expects Bitcoin (BTC) and altcoins to exhibit different market dynamics.
First, Bitcoin, as the market leader, has shown strong upward momentum in August. However, its market dominance has been declining since breaking through the historical high of $120,000. The latest data shows that Bitcoin's market dominance has dropped from about 65% at the beginning of August to 57.2%, marking the lowest level since 2023, while the altcoin season index has reached 72, just a step away from entering "altcoin season." This index is above last week's average level of 50 and last month's average level of 43.
Analysts point out that in this situation, altcoins may see greater gains after Bitcoin, and suggest paying attention to altcoins such as SUI, ADA, SEI, and LINK, as these projects have demonstrated outstanding performance in technological innovation and market demand, potentially attracting more investors after a rate cut.
A rate cut typically means increased liquidity and lower borrowing costs, leading investors to pursue higher-risk assets, which often drives the crypto market up. However, market reactions are not absolute, and there can be unexpected situations.
For example, the Federal Reserve announced two consecutive emergency rate cuts in March 2020, lowering the rate range to 0% to 0.25%, and the market entered the "zero interest rate era" overnight. However, due to the extreme uncertainty and systemic risks posed by the pandemic, the cryptocurrency market still experienced one of the most severe single-day crashes in history on March 12 of that year, a day referred to by crypto investors as the "312 event" or "Black Thursday."
In July 2019, to address the uncertainties brought about by global trade frictions and economic slowdown, the Federal Reserve cut rates for the first time in over a decade. Although this move garnered widespread attention in traditional financial markets, the cryptocurrency market reacted relatively calmly. Bitcoin only experienced a brief price fluctuation on the day the news was announced, before returning to a stable trend. This was mainly because the market had already fully anticipated that the Federal Reserve would adopt an accommodative policy, and investors had priced in the positive factors before the rate cut. Additionally, the macro environment at that time was still overshadowed by global economic weakness and risk aversion, which also somewhat weakened the uplifting effect of the rate cut.
Having clarified that the rate cut itself is not the sole driving factor for market trends, investors need to pay more attention to a series of key indicators that can reflect risk appetite and capital flows, in order to gauge the true direction of the crypto market.
Generally, macro-financial indicators like the U.S. dollar index will be the primary focus of reference. If a rate cut leads to a weaker dollar, it often benefits dollar-denominated assets like Bitcoin; conversely, if the dollar remains strong, crypto assets may come under pressure. At the same time, the U.S. Treasury yield curve and the VIX volatility index are also worth noting, as the former reflects market judgments on economic prospects, while the latter indicates overall risk sentiment.
Next, it is essential to observe internal indicators of the crypto market. The on-chain inflow of stablecoins is often seen as a "munition indicator"; an increase in stablecoins entering exchanges usually signifies a strengthening of potential buying power. Additionally, the net inflow/outflow of funds on exchanges can reveal whether the market is leaning towards cashing out or continuing to build positions.
Finally, signals from the derivatives market should not be overlooked. The open interest and funding rates of Bitcoin and Ethereum futures can reflect the true positioning tendencies of institutions and large funds. If the funding rate remains positive for an extended period, it indicates excessive market optimism, which may signal short-term adjustment risks.
Weak employment data has overshadowed inflation pressures, and the market generally expects the Federal Reserve to cut rates, but the crypto market's response is not one-sided. Bitcoin has shown upward momentum but its dominance is declining, while altcoins are expected to rise. However, a rate cut is just one factor influencing market trends; the movements of the dollar, Treasury yields, market volatility, as well as stablecoin liquidity and derivatives positions are the key references for assessing future market directions.
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