Fed Cuts Rates 25 bps: What It Means for Bitcoin, Inflation, and Market Risk

The Federal Reserve delivered what many expected yesterday, cutting interest rates by 25 basis points from 4.75% to 4.5%. Yet Bitcoin tumbled from recent highs near $108k back down to around $101k, while the broader crypto market struggled alongside a nearly 3% drop in the S&P 500.

Key Takeaways

• The Fed cut rates by 25 basis points as expected, but markets are pricing in only two more cuts for 2025
• Quantitative tightening continues with no clear timeline for when balance sheet expansion will resume
• Bitcoin dominance hit 58% and appears headed toward 60% as altcoins struggle against their BTC pairs
• The dollar's strength into year-end could pressure risk assets, following historical patterns from previous cycles
• Labor market data shows cooling conditions with hiring and quits declining, though layoffs remain low
• The yield curve is normalizing as the 10-year treasury yield bounces higher despite rate cuts
• Powell emphasized policy remains "meaningfully restrictive" above the theoretical neutral rate
• Altcoins may need to wait until actual quantitative easing returns before seeing sustained rallies
• Current market dynamics mirror late 2016 patterns when the dollar rallied into early 2017
• Bitcoin's weekly chart still looks healthy despite the recent correction from $108k to $100k

The Fed's Mixed Messages Create Market Uncertainty

Here's what's really interesting about yesterday's FOMC meeting. Sure, they cut rates like everyone expected, but the devil was absolutely in the details. When you dig into the summary of economic projections, you see that most Fed officials are only penciling in two rate cuts for next year. That's potentially less aggressive than what markets were hoping for.

Powell's commentary painted a picture of an economy that's strong overall, but with some concerning undercurrents. He noted that "conditions of the labor market are less tight than in 2019" – that's significant because 2019 was our last rate cutting cycle. What he's seeing is a labor market that's definitely cooling, but not collapsing.

• Job creation has fallen well below levels needed to keep unemployment stable
• The job finding rate is both low and declining across multiple metrics
• Surveys of workers and businesses show a much cooler environment than 2019
• Quits and other voluntary job changes have trended downward significantly

The unemployment rate itself remains relatively low, but that's partly because layoffs haven't spiked yet. What we're seeing instead is new entrants to the labor force having a much harder time finding work. If you've got a job, there's a decent chance you can keep it. If you don't have one, good luck finding one.

This creates an interesting dynamic where the Fed feels comfortable cutting rates, but not aggressively so. Powell emphasized that current policy remains "meaningfully restrictive," meaning he believes the 4.5% rate is still above the mysterious "neutral rate" – that theoretical level where the economy neither expands nor contracts.

Why Quantitative Tightening Matters More Than Rate Cuts

What really caught my attention from yesterday's meeting was the continued emphasis on quantitative tightening. The Fed explicitly stated they'll keep "reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities." No timeline, no conditions – just continued balance sheet reduction.

This might actually be more important for crypto markets than the rate cuts themselves. Looking at total assets held by the Federal Reserve, we've been in a steady downtrend since early 2022. Last cycle, quantitative tightening didn't last nearly as long as what we're experiencing now.

Here's something that should make crypto investors pause: Bitcoin dominance didn't actually peak last cycle until QE began. Even then, it took over a year for dominance to really start declining durably. That could partially explain why Bitcoin dominance has shown such resilience recently, continuing to climb back toward that 60% target.

• Current Bitcoin dominance sits at 58%, approaching levels not seen since earlier in the cycle
• The bull market support band for Bitcoin dominance appears to be providing technical support
• Dominance excluding stablecoins is trying to break back into its long-term wedge pattern
• Historical patterns suggest altcoins struggle during QT periods, regardless of rate policy

The thing is, we're seeing an almost identical pattern to what happened last cycle. Dominance dropped in November of the halving year, just like this time, then recovered in December and continued climbing into January of the post-halving year. It's tempting to think narrative drives price, but more often price creates the narrative after the fact.

Dollar Strength Pressures Risk Assets Into Year-End

One of the most important dynamics playing out right now is dollar strength, and it's following a playbook we've seen before. Back in September when the Fed started cutting, I mentioned we'd likely see the dollar rally through year-end, and that's exactly what's happening. The dollar was down around 100 on the DXY, and now it's pushing 108.

This matters because the dollar and the long end of the yield curve have been highly correlated. What's particularly unusual is seeing the 10-year treasury yield bounce higher even as the Fed cuts rates. Normally, you'd expect longer-term yields to follow the Fed lower, but instead we're seeing the opposite.

The 10-year yield appears to be repeating a pattern from about a year ago where it formed some tops, broke out higher, then came back to retest the breakout level. We might be seeing the same thing now, and if the long end breaks out to go higher, it could pressure risk assets further.

• The dollar-Bitcoin dominance correlation remains strong during these periods
• TLT (treasury bonds) often find macro double bottoms during these cycles
• A stronger dollar historically pressures altcoins more than Bitcoin itself
• The pattern mirrors late 2016 when altcoins struggled until early 2017

If you overlay Bitcoin dominance with the dollar, you can see they tend to move together during these rallies. As the dollar continues its march higher, dominance typically follows, which is exactly what we're witnessing now.

Labor Market Tells a Complex Story

Powell spent considerable time discussing labor market conditions, and for good reason. The data tells a nuanced story that's worth understanding. While the unemployment rate remains relatively low, the composition of that unemployment is shifting in important ways.

Unemployment due to job losers has been in a controlled uptrend – not parabolic like we see during recessions, but definitely moving higher. The bigger story is new entrants to the labor force, which has gone almost parabolic. This suggests it's become extremely difficult to find a job if you don't currently have one.

Meanwhile, layoffs and discharges have actually remained relatively low, even lower than pre-pandemic levels on average. This creates a strange dynamic where if you have a job, you can probably keep it, but if you're looking for work, you're facing a much tougher environment.

• Hires have been trending down for an extended period
• Quits have also declined significantly, indicating less worker confidence
• Initial jobless claims remain around 242,000, well below the 300,000 threshold that typically signals trouble
• The job finding rate continues to deteriorate across multiple measures

Powell noted that "job creation is now well below the level that would hold unemployment constant," which is Fed-speak for saying the labor market is definitely cooling. The question is whether this cooling turns into something more problematic.

Here's where it gets interesting from a recession perspective. Powell said he thinks "it's pretty clear that we've avoided a recession," but he also acknowledged that "monetary policy operates with long and variable lags." Just because we haven't seen a recession yet doesn't mean we won't.

Yield Curve Normalization and What It Means

We're witnessing something fascinating happen with the yield curve right now. After being inverted for an extended period, it's rapidly normalizing as the Fed cuts the short end while the long end moves higher. A year ago, the yield curve was completely inverted. Today, it's looking much healthier.

This normalization process is important because historically, yield curve un-inversion can precede recessions, though the timing is highly variable. Sometimes recessions follow within months, other times it takes a year or more. In one case back in 1967, it took two full years.

The 10-year yield's behavior is particularly intriguing. It's possible we're seeing the market price back in inflationary concerns, though Powell specifically addressed this. He noted that "the labor market is not a source of significant inflationary pressures," pointing out that unemployment is rising rather than falling.

• The yield spread between US and Japanese rates continues to narrow
• This could eventually impact the carry trade, though effects take time to materialize
• Inflation has started ticking up slightly, though not yet concerning levels
• The dynamic differs from the 1970s when falling unemployment drove inflation higher

That's a key difference from the inflationary periods of the 1970s. Back then, unemployment was falling when inflation accelerated. Now we have rising unemployment alongside modest inflation increases, which suggests different underlying dynamics.

Bitcoin and Altcoin Technical Outlook

From a technical perspective, Bitcoin's correction from $108k to around $100k looks relatively minor on the weekly timeframe. You can barely even notice it on the longer-term charts, which speaks to how strong the underlying trend remains.

However, the altcoin situation is more concerning. Many altcoins are struggling on their Bitcoin pairs, finding themselves at technically significant levels. Interestingly, these levels match previous cycle lows from June 2019 and August 2017, suggesting we're at potential inflection points.

The bull market support band for many altcoins sits around the 0.04 to 0.041 level. If altcoins are going to bounce meaningfully, it probably won't happen until they reach those levels. There's still a non-negligible chance they eventually return to range lows, even though Bitcoin dominance has already reached 60% this cycle.

• All Bitcoin pairs are testing critical support levels from previous cycles
• Many altcoins appear to be "stuck in traffic on struggle street" as QT continues
• The wedge pattern on dominance excluding stablecoins suggests potential resolution ahead
• Historical precedent shows altcoins often struggle through December of halving years

Remember, even in October of the post-halving year in 2017, many altcoins were still at range lows despite Bitcoin's strong performance. It wasn't until 2018 that we saw the massive altcoin rally everyone remembers.

Looking Ahead: What Changes the Game

The big question facing crypto markets is what catalyst will shift the current dynamics. Based on historical patterns and current Fed policy, it seems like we might need to wait for actual quantitative easing to resume before seeing sustained altcoin outperformance.

The Fed gave no clear insight into when quantitative tightening might end. They'll "carefully assess incoming data" but continue reducing their balance sheet holdings. This creates a challenging environment for risk assets, particularly smaller cryptocurrencies.

Market participants keep trying to front-run Fed policy, but this often backfires. The Fed then feels compelled to stay restrictive longer because markets get ahead of themselves. It becomes a game of chicken between the Fed and market expectations.

I'm still expecting the dollar to remain strong into early 2025, potentially reaching 109-110 before topping out. If we use fibonacci retracements on the dollar's recent move, the 61.8% level sits around 109, while the 78.6% level is all the way up at 111. The prior high from this cycle is near 115, so there's still room to run.

The Bank of Japan's next move will also be critical to watch. If they raise rates while the Fed is cutting, it could accelerate the unwinding of the carry trade, creating additional headwinds for risk assets globally.

Ultimately, while the current environment feels challenging for altcoins, these cycles tend to be longer and more drawn out than people expect. The patterns we're seeing now mirror what happened in late 2016, when altcoins struggled through year-end before finally breaking out in the post-halving year. Patience often pays off in these macro-driven markets, but it requires navigating through periods exactly like what we're experiencing now.