Crypto: what effect will the Fed’s rate cut have?

Today, it is expected that the Fed will cut interest rates by 25 basis points. The cut is considered so likely that it has already been fully priced in by the markets, including the crypto ones. 

However, it is not absolutely certain that the reaction will be null after the announcement, because there is more to it. 

The Fed’s Rate Cut

In addition to the expected announcement of the rate cut, the Fed will also release a press statement. Furthermore, the usual press conference by President Powell will follow.

What is not yet priced in by the markets are the potential further rate cuts in the coming months. 

To be honest, regarding the upcoming decision expected on December 10, the markets are betting that there is more than an 80% probability of another 25 basis point cut being made. 

Instead, as for 2026, uncertainty still prevails. 

The point is that both the Fed’s press release, which will be published shortly after today’s decision announcement, and especially Powell’s words at the press conference, could significantly alter future probabilities. 

At this moment on the CME FedWatch, there is only a 43% probability that the Fed will cut rates by 25 basis points in January, with a 49% probability that it will not cut. 

Furthermore, assuming almost as a given that from now until the end of the year there will be a total of two more cuts of 25 points, including today’s, during 2026 there is only a 28% probability that there will be another two cuts of 25, with a 27% chance that instead the cuts will be three. 

The reaction of the crypto markets

The crypto markets, just like traditional ones, will probably not react to today’s 25 basis point rate cut, assuming it happens. 

However, they could react, even immediately, to the press release that the Fed will publish shortly after, as well as to Powell’s words.

There are specifically two things that could change and potentially make the markets react. 

The first is the probability of a further 25-point cut in December. 

In fact, it is currently given an 85% probability, but if, for example, the markets were to bet on an increase to 90%, they might react positively. Conversely, if the probabilities were to drop to 80%, or lower, they would likely react negatively. 

The second thing is the probability of a further cut in January. 

In this case, however, the reaction could be greater, because the current estimate of 43% is low, and indeed the hypothesis that rates will not be cut in January is favored. 

Should the markets today bet with much higher probabilities on a further cut in January, in theory, they should react very well, although the further ahead the forecasts go, the less precise they become. 

To be honest, they might react well even if the probabilities of having three total cuts, instead of two, increase over the course of 2026, but in this case, these are forecasts that are really too far ahead in time. 

The Competition

This time, however, there is an additional problem. 

In fact, for the past few days, a speculative mini-bubble seems to have inflated in the stock market which, especially since yesterday, has been draining liquidity from the crypto market. 

This complicates things, because if the markets were to react well today, it would most likely be the equities that benefit the most. 

It is therefore not to be excluded that if today the mini-bubble in the stock market continues to inflate, more liquidity could be drained from the crypto markets, after what already exited yesterday. 

However, it should be emphasized that mini-bubbles are inevitably destined to burst sooner or later, so much so that already today, or at least by the end of this week, the brief momentary rally in equities could temporarily come to a halt. In such a case, the liquidity drained from the crypto markets could also return. 

The role of the dollar

However, one last unknown remains: the Dollar Index (DXY). 

In fact, for a new genuine bull run in crypto to begin, it would be necessary for the Dollar Index to decline significantly. 

The problem, however, is that if it did so today, it might end up further fueling the stock market rally, and not that of the mercato crypto. 

It must be said that generally a reduction in interest rates also causes the Dollar Index to fall, because it triggers a slow but inexorable increase in liquidity in circulation that ends up slightly devaluing the currency. 

The Dollar Index has already fallen significantly since the beginning of the year, so much so that it is not far from the lower line of the ascending channel that has lasted for 18 years. Therefore, in reality, one would not expect a sharp decline in the short term, which, however, could eventually occur in the medium term. 

Therefore, even if today the crypto markets do not react very well, in reality there is still time for them to do so before the end of the year.