Bitcoin Reaction to Fed Interest Rate Decision Hinges on Powell's Forward Guidance, Say Analysts

Bitcoin (BTC) is holding steady around the $60,000 mark, showing resilience just hours before the Federal Reserve is set to announce its interest rate decision later on Wednesday.

The leading cryptocurrency is trading 2.5% higher during European trading hours on Wednesday, while Ethereum (ETH), the second-largest cryptocurrency by market cap, is up 0.5%, trading at $2,320.

While Bitcoin and Ethereum are showing gains, the broader cryptocurrency market remains largely flat with altcoins like Solana (SOL) down 1%, (XRP) down 1.6%, (BNB) up 0.8%, Dogecoin (DOGE) up 0.6%, and (TON) up 0.2% are exhibiting mixed performances, indicating market jitters ahead of the Fed’s move, which could send ripple effects across both traditional and digital asset markets.

The Federal Reserve is widely expected to announce a 25 to 50 basis point (bps) rate cut, with CME’s FedWatch tool suggesting a 61% likelihood of a larger 50 bps reduction.

While a reduction in interest rates typically bolsters risk-on assets like Bitcoin, the focus will be on the Fed's forward guidance, according to Illia Otychenko, Lead Analyst at CEX.IO.

In a note sent to Decrypt, Otychenko said that even if the Fed opts for a 50 bps cut, the market's reaction may hinge on Federal Reserve Chairman Jerome Powell's commentary about future monetary policy actions.

"Without clear forward guidance, institutional investors may reduce their risk exposure, which could dampen Bitcoin’s bullish momentum," said Otychenko.

However, in the long term, Bitcoin continues to signal potential upside, with the Puell Multiple—a key market metric—falling below 0.5. This historically has been a buying signal, indicating a possible market bottom.

The Puell Multiple is an indicator that compares the daily issuance of Bitcoin (in USD) to its 365-day moving average, helping identify potential market tops and bottoms based on miner profitability.

Institutional flows into Bitcoin-related investment products have shown significant interest ahead of the Fed's decision.

On September 17, Bitcoin spot ETFs saw a net inflow of $187 million, marking four consecutive days of positive inflows. Fidelity’s ETF (FBTC) alone accounted for $56.61 million, while Bitwise’s ETF (BITB) saw inflows of $45.35 million, underlining the growing institutional appetite for Bitcoin as macroeconomic uncertainties loom.

In contrast, Ethereum-related investment products saw net outflows on the same day, with Grayscale’s Ethereum Trust (ETHE) experiencing a significant outflow of $17.88 million, apparently suggesting that investors are prioritizing Bitcoin as a safer bet amidst market volatility.

Kris Haralampiev, Structured Products Lead at Nexo told Decrypt that lower interest rates generally increase liquidity in the market, often pushing investors toward riskier assets like cryptocurrencies. Historically, Bitcoin has benefited from rate cuts, as seen during the COVID-19 pandemic when accommodative monetary policies fueled astrong rally in the crypto market.

“Bitcoin thrives when liquidity is abundant,” Haralampiev said, adding that the medium- to long-term outlook for Bitcoin remains bullish, particularly if the Fed continues to ease monetary conditions. However, short-term volatility is expected, especially if the Fed’s rate cut surprises market participants with a more aggressive stance or if recessionary concerns deepen.

Edited by Stacy Elliott.