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The Federal Reserve’s (Fed) decision to cut interest rates on 18 December 2024 shook global financial markets, significantly impacting Bitcoin prices and stock markets.
Although a 0.25-point rate cut was expected, the projection of a further cut in 2025 caused investors to react adversely. Bitcoin experienced a sharp decline in the crypto market after hitting a record high of US$108,000 earlier in the week, falling to around US$100,752.
Impact of Interest Rate Cut on Financial Markets
Many analysts predicted the Fed’s decision to cut interest rates by 0.25 points on 18 December 2024. However, the lower-than-expected projected rate cut for 2025 heavily influenced the market reaction. In the announcement, the Fed stated they only plan to cut interest rates twice in 2025, each by 0.25 points. This is much lower than the projection in September, which estimated four rate cuts.
Jerome Powell, Chairman of the Fed, revealed that this slowdown in interest rate cuts reflects predictions of higher-than-expected inflation in 2024 and expectations of inflation remaining high in 2025. Powell also explained that the December decision reflects a more cautious policy, where the Fed will set a higher bar for future rate cuts. The ultimate goal is to keep inflation back to 2% without damaging the labor market or the overall economy.
This lowering of expectations for interest rate policy directly impacted the stock market and crypto markets. On Wall Street, major stock indices such as the Dow Jones Industrial Average and Nasdaq experienced sharp declines, falling 2.5% and 3.5%, respectively.
Bitcoin felt the biggest impact in the crypto market, with a price drop of around 5.3%, from its record high of US$108,000 to around US$100,752. Other altcoins were also affected, with Ethereum (ETH), Binance Coin (BNB), and Solana (SOL) all seeing price drops of under 5% in the last 24 hours.
Bitcoin and its Potential Impact on Financial Stability
Bitcoin’s price decline has affected the crypto market and indicates broader uncertainty regarding the role of crypto assets in the global financial system. During a press conference on 19 December 2024, Jerome Powell confirmed that the Fed will not keep Bitcoin on its balance sheet. This is due to restrictions in the Federal Reserve Act, which governs the authority of the US central bank.
Powell explained that the Fed cannot hold Bitcoin in reserve as the law regulates what the US central bank can hold. Furthermore, he emphasized that changing the rules related to Bitcoin ownership is the authority of the US Congress, not the Fed, and his institution intends to refrain from seeking legislative changes in this regard. This stance reflects the uncertainty surrounding the regulation and oversight of cryptocurrencies in the US, especially amid the increasing reliance on blockchain technology and digital currencies.
In addition, the Fed has shown a more skeptical attitude toward assets like Bitcoin. The institution’s main focus is on how cryptocurrencies may affect banking sector stability and consumer protection. Powell emphasized that the Fed will continue to closely monitor the relationship between crypto businesses and the banking sector to ensure the interaction does not threaten the health and sustainability of the financial sector.
Conclusion
The rate cut announced by the Fed in December 2024 represents a significant shift in monetary policy that affects various sectors of the economy, including the stock and crypto markets. While the projection of a further cut in 2025 was expected, the market reaction showed uncertainty towards the policy direction.
Bitcoin, which had reached record highs, is now experiencing a sharp decline, reflecting investors’ concerns about the impact of monetary policy and unclear regulations on crypto assets. The Fed remains cautious in its approach to crypto-asset regulation, and further Bitcoin-related decisions will depend on broader legislative policies.
Going forward, monitoring how the Fed’s policies and crypto regulations affect global markets will be important, especially given the uncertainty over inflation and other global economic challenges.