Financial markets are volatile, and the latest data from the CME's 'FedWatch' sparked a huge uproar as soon as it was released. Data shows the probability of a 25 basis point rate cut by the Fed in September skyrocketed to 87.8%. This is not just a simple 'possible rate cut,' it is almost equivalent to a rate cut being a foregone conclusion. In just one month, the probability of rate cut expectations doubled from below 50%, sending a very strong signal: The curtain of US dollar liquidity easing is about to rise, which undoubtedly is a windfall for the crypto market, with BTC, ETH, and other cryptocurrencies seemingly poised to soar in this liquidity carnival.
1. Rapid rise in interest rate cut expectations, significant shift in market direction
A month ago, the market was still debating whether the Fed would cut rates in September, but now it has skipped that topic and begun to discuss how many more rate cuts may follow. This dramatic shift is not without reason, as three key factors have jointly propelled the probability of rate cuts to a high of 87.8%.
- Economic data lagging behind, growth momentum insufficient: Recent consumer confidence indices and employment data released by the US have fallen far below expectations, and the pace of economic growth has clearly slowed. In this context, the Fed faces immense pressure, and to avoid the economy falling into a predicament, 'preventive interest rate cuts' become an inevitable choice. After all, in the current situation, ensuring stable economic growth is more important than fighting inflation, and maintaining the vitality and stability of the economy is paramount.
- Trump exerts strong pressure, political intervention intensifies: Trump has recently stepped up his attacks on the Federal Reserve, with rumors of wanting to fire Fed Governor Cook. The obvious goal is to force the Fed to adopt a loose monetary policy in an election year, creating an illusion of economic prosperity through liquidity to bolster his election chances. Under such strong political intervention, the independence of the Fed is severely challenged, and interest rate cuts have almost become an irresistible choice to balance political pressure and the need for economic stability.
- Powell's dovish tone sets a clear inclination towards rate cuts: At the Jackson Hole meeting, Powell specifically mentioned 'risks in the labor market' and 'trade tariffs dragging down the economy,' which undoubtedly released a clear signal to the market - the Fed is preparing to cut rates. As the Fed Chairman, his remarks acted like a stabilizing anchor, instantly bringing market expectations of rate cuts to a peak, prompting investors to adjust their investment strategies based on this signal.
Now, the market's focus has shifted from 'whether to cut rates' to 'will there be another rate cut in October' (with the current expected probability at 43%) and 'how many times will rates be cut next year.' Morgan Stanley even boldly predicts that the Fed will cut rates by 25 basis points in September and December, and then continue to cut rates each quarter until the end of 2026. This expectation of continuous easing undoubtedly provides a huge tailwind for risk assets, giving them strong momentum and support for rising.
2. The crypto market is about to celebrate, as historical experience shows
Some may wonder, what is the connection between the Fed's rate cuts and the crypto market? In fact, historical data has clearly revealed the pattern: Whenever US dollar liquidity enters a easing cycle, Bitcoin, Ethereum, and other risk assets consistently lead in gains, becoming the big winners in the market.
- In March 2020, unlimited QE sparked a crypto bull market: At that time, the Federal Reserve initiated an unlimited quantitative easing (QE) policy, causing market liquidity to flood instantaneously. Against this backdrop, Bitcoin surged like a runaway wild horse, with its price skyrocketing from $3,800 to $69,000, a staggering increase of 18 times, making early Bitcoin investors extremely wealthy.
- In July 2023, expectations of interest rate cuts drove cryptocurrency prices up: The Fed paused interest rate hikes and signaled the possibility of rate cuts, and this news acted as a catalyst, causing Bitcoin's price to climb rapidly from $25,000 to $73,000, nearly doubling. Investors keenly seized this opportunity, actively positioning themselves in the crypto market and enjoying the substantial returns from the market rise.
Now, the expectations for interest rate cuts are clearer than ever, with an 87.8% probability almost equivalent to a definite rate cut. In this case, funds will naturally not miss this excellent opportunity and will rush in to seize positions. Recently, Bitcoin has returned to $110,000, and Ethereum has broken through $4,600, with the main driving force behind this being the strong expectations of rate cuts. Investors believe that with the implementation of interest rate cuts by the Fed, cryptocurrency prices are likely to continue to rise, creating new historical highs.
More critically, this loosening cycle may last longer. If it unfolds as Morgan Stanley predicts, with rate cuts continuing until the end of 2026, then the crypto market will usher in a long 'liquidity dividend period.' This not only signifies rapid price increases in the short term but may also initiate a grand 'slow bull' market. Continuous easing funds will seek investment channels for appreciation, and Bitcoin's 'digital gold' property grants it scarcity and value retention functions, while Ethereum's ecological growth attributes endow it with tremendous development potential. They will become preferred choices for funds, attracting substantial inflows and driving prices steadily upward.
3. Focus on two key signals to grasp market trends
Although the current expectation of interest rate cuts has been fully digested by the market, the cryptocurrency market will not rise in a straight line; there are still many variables. Investors need to closely monitor two key signals to accurately grasp the trend of market development.
- The results of the September interest rate meeting are crucial: The September meeting will become a key turning point for the market. If the Fed not only cuts rates by 25 basis points as the market expects but also further hints at accelerating the pace of rate cuts, it would undoubtedly be super good news. In this scenario, Bitcoin could break through the $120,000 barrier, and Ethereum might reach a high of $5,000, welcoming a new round of market euphoria. However, if the Fed proceeds with rate cuts in a methodical manner but emphasizes that future policies will depend on data, the market may experience a short-term pullback. Even so, the long-term logic of easing has not been broken, and pullbacks could actually become excellent entry points for investors who missed earlier price increases.
- The speed of capital inflow determines the height of the market: The flow of funds is an important indicator for judging market conditions. Recently, $1.6 billion in stablecoins flowed into Binance, and ETH ETFs saw a net inflow of $455 million in a single day, all of which are clear signals that funds are positioning themselves in the crypto market ahead of time. If stablecoins continue to flow in and ETF funds keep accumulating, it indicates that both institutions and retail investors are actively competing for positions, further enhancing the market's upward momentum and making the rise more robust. Conversely, if capital inflows suddenly halt, investors need to be wary of the risk of a 'pullback after expectations are fulfilled.' When the market's expectations of rate cuts are fully reflected in prices, and no new funds are driving the market forward, prices may fall back, requiring investors to adjust their strategies timely to avoid risks.
In summary, the current 87.8% probability of interest rate cuts has laid the groundwork for a 'liquidity carnival.' For crypto investors, there is no need to dwell on whether a bull market will come; instead, they should seize this rare opportunity brought by the 'loosening cycle.' After all, moments when the Fed injects liquidity are not common, and if missed, it may take years to encounter such investment opportunities again. In this market filled with opportunities and challenges, investors need to maintain sharp insight, closely monitor market dynamics, and adjust their investment strategies in a timely manner based on key signals to share in the gains of this liquidity carnival and achieve asset appreciation.
