Brace for Crypto Market Volatility: Investors Hold Breath As Fed Rate Cuts Loom

Markets are bracing for impact as the Federal Reserve signals potential rate cuts—and crypto traders know what that means: buckle up.

When traditional finance sneezes, digital assets catch a cold—and sometimes develop full-blown pneumonia. The Fed's potential pivot toward lower rates sends shockwaves through risk-on assets, with cryptocurrencies positioned squarely in the crosshairs.

Rate cuts typically weaken the dollar, pushing investors toward alternative stores of value. Bitcoin and its altcoin brethren often benefit from this flight to digital scarcity—but not without stomach-churning volatility along the way.

Traders are positioning for whiplash. Options markets show heightened demand for protection against sudden price swings, while derivatives traders increase hedging activity across major exchanges.

Meanwhile, the usual suspects—Bitcoin maximalists and DeFi degens—are already placing their bets. Some see rate cuts as rocket fuel for the next crypto bull run; others anticipate a classic 'buy the rumor, sell the news' scenario that leaves leveraged positions in ruins.

Because nothing says 'sound monetary policy' like making speculative asset classes the primary beneficiary of central bank desperation.

Rate Cuts: Interest Rates Expected To Fall To 4.0%-4.25%

Sticking to the established trend, the market continues to expect the Fed to cut rates on September 17. After spending weeks in favor of a rate cut, the FedWatch Tool on the CME Group website shows that market watchers are now favoring that rates WOULD come down after the latest meeting, pushing the interest rates down to the 4.00%-4.25% region.

After rising over 97% in the past week, the probability of a rate cut has maintained an over 95% average. At the time of writing, the tool is now showing 96.1% probability of the Fed cutting interest rates. This is still very close to the 97.6% that was recorded and reported by NewsBTC a little over a week ago.

Interestingly, the tool has now debuted a 3.9% probability of interest rates being cut down even further to 3.75%-4.00%, a complete flip that was not seen last week. This shows how market watchers are viewing the FOMC meeting at this time, and with the announcement so close, it is likely to come out in favor of this.

In all of this, the one thing that has not changed is the sentiment around a possible rate hike. Over this time, there has been a 0% probability that the Fed would choose to increase interest rates at this time, something that would be bearish for the markets.

Crypto Market Could See Volatility

In the event of a rate cut to 4.00%-4.25%, expectations are that risk assets such as crypto and stocks will benefit the most. This is because lower interest rates encourage more risk-taking, and often, the effect of an interest rate cut is felt right after the announcement.

It is expected that an interest rate cut will send the crypto market soaring. However, it is prudent to watch how the market unfolds before jumping in, as volatility will be quite high in the first few hours following the announcement. It is also possible that the Fed would choose to keep interest rates the same, which would not be as bullish for the markets, but wouldn’t exactly be bearish either. In contrast, an interest rate hike would definitely crash the market.