Fed Rate Cut Looms: Could This Be Bitcoin's Next Big Catalyst?

Federal Reserve Decision: What Crypto Traders Need to Know

The Federal Reserve is almost certain to cut interest rates on Wednesday, with traders predicting a 97.8% chance of a 25-basis point cut. However, the real game-changer for Bitcoin and crypto markets might be the potential end of quantitative tightening (QT).

Understanding Quantitative Tightening and Its Impact

Quantitative tightening occurs when the Fed reduces the money supply by letting its bond holdings shrink—effectively pulling cash out of circulation to cool the economy and fight inflation. This is the opposite of quantitative easing (QE), where the Fed pumps money into the system by buying bonds.

Dr. Andre Dragosh, head of research in Europe for Bitwise, told Decrypt that ending QT could create a "tailwind" for Bitcoin by signaling a higher tolerance for inflation. Bank of America and JP Morgan have already indicated they expect the Fed to end QT soon, with Fed Chair Powell's recent statements supporting this likelihood.

Current Market Conditions

At the time of writing, Bitcoin was trading flat around $114,850, having lost 0.1% in the past 24 hours. Ethereum fell slightly by 2.2% but remained above $4,100, up 2.7% from a week ago. Analysts believe investors have already priced in the rate cut, which historically supports crypto and other risk-on assets.

Inflation Expectations and Monetary Policy

Dragosh emphasized that "the end of QT would certainly send a clear signal for higher inflation tolerations—closer to 3% over the medium term." He noted that past announcements of easier monetary policy, such as QE1, QE2, and Operation Twist, have led to significant increases in inflation expectations.

Prediction markets reflect this sentiment: Myriad users see a 90% chance of a Fed rate cut, while the CME FedWatch Tool shows a 97.8% probability, with an 89% chance of another cut in December.

Bullish Outlook for Crypto

"Rate cuts add fuel to the already accelerating liquidity growth in the U.S. and globally," Dragosh said. "We are most likely looking at an extension of the current bull market well into 2026 and no imminent cycle top." He added that a relaxation in U.S.-China trade tensions could further strengthen this view, with gold's sell-off indicating a potential risk-on scenario that supports Bitcoin and crypto assets.

Trader Caution and Risk Management

Jonathan Rose, CEO of BlockTrust IRA, cautioned traders against overcommitting. "In September, the market might have overestimated policy easing, leading to crowded positioning," he said. "We should go against the crowd, expecting a reversal if the market initially reacts positively to the rumor but then sells the fact."

Rose highlighted the importance of monitoring the $111,000 to $115,000 range for Bitcoin, as this area could be a starting point or a point of failure. "With high leverage involved, risk management is super important," he stressed. "If the Fed's message changes, we could quickly close positions."

Additional Context: Bitcoin Leverage and Fed Vote

Bitcoin traders are building leveraged positions nearing $40 billion ahead of the Fed meeting, anticipating further cuts this year. The decision has become a focal point for investors expecting a quarter-point cut to bolster risk assets, including crypto.

Key Factors to Watch

• U.S.-China trade relations: Uncertainty persists until Presidents Trump and Xi meet on Thursday.
• Fed messaging: Any deviation from expected policy could trigger rapid position closures.
• Inflation tolerance signals: Ending QT would indicate a shift toward higher inflation acceptance, benefiting Bitcoin.