Did Cryptos Anticipate the Fed's Rate Cut Challenges?

The world was wondering about the trigger for a flash crash in cryptos at the start of the week, even as stocks and gold extended their record-breaking rally.

Although the Federal Reserve’s much-anticipated rate cut, cryptocurrencies did not gain as expected, raising doubts about their sensitivity to monetary policy. Instead, digital assets saw their values tumble, with Bitcoin and Ether hitting multi-week lows amid liquidations of well over $1.7 billion.

This inconsistency pointed to a deeper question: was there an early signal cryptos picked up before other markets? Not many could come up with an answer. Well, not until Fed Chair Jerome Powell's speech on Tuesday, at least.

Speaking for the first time since the Fed cut rates last week, Powell indicated that the projections for employment and price pressures were subject to uncertainties. The Fed boss emphasized his perspective that decision-makers are likely to encounter challenges as they consider additional interest rate cuts.

This, despite the dot plots suggesting two more rate hikes this year, compared to just one in July.

The Fed chair said, "Near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation."

Powell added, "Two-sided risks mean that there is no risk-free path."

More importantly, the central bank head provided no indications regarding his potential backing for a rate cut at the next Fed meeting in October.

That contrasts with his stand for a tilt in policy view at Jackson Hole in August, igniting bets for a cut in September, which the Fed followed through on by lowering rates by 25 basis points.

Damned If You Do, Damned If You Don't

What's complicating the Fed's policy path is the lagged surge in inflation from Trump's tariffs, while the jobs market shows significant weakness. There are clear signs now that Trump's extravagant trade policies are starting to reflect in consumer price inflation. The real worry for the central bank is its misstep post the COVID pandemic, when they were late on the rate curve, anticipating inflation to be transitory.

On the other hand, the reason for the shift in policy after staying on the sidelines since December 2024 was big revisions to the downside of the unemployment data for much of this year.

Clearly, Fed policymakers need to tread a balancing act, with opposing views bringing the widely known catch-22 phrase: damned if they do and damned if they don't.

Powell Trying to Hit Back at Political Pressure?

The other argument for Powell's cautious tone and withholding any rate signal is to show the world that the cut last week was driven more by economic reasons rather than Trump breathing down his neck.

Trump and his administration have repeatedly attacked the Fed for not cutting rates throughout the year. The President even fired Fed Governor Lisa Cook to prove his point. While Cook is currently fighting her removal, Trump's intent to influence policymakers is in plain sight for everyone to see.

In the latest pressure from the US administration, after Powell's speech on Tuesday, Treasury Secretary Scott Bessent conveyed his dissatisfaction regarding the lack of a clear agenda from the Fed boss on the rate cut path.

Bessent, in an interview with Fox News, said, "Rates are too restrictive; they need to come down. I’m a bit surprised that the chair hasn’t signaled that we have a destination before the end of the year of at least 100 to 150 basis points."

During his speech this week, Powell did address the difficult political atmosphere around the Fed. He also hit back at allegations that the central bank had made politically influenced policy decisions.

The Fed chief said, "We're looking at what’s the best thing for the people that we serve." He added, "Truth is mostly people who are calling us political — it’s just a cheap shot."

Market Reaction to the Drama

Stocks lost some of their allure, while gold held steady near its record highs on Wednesday.

The tech stocks rally faded on the lack of enthusiasm from Powell on expected rate cuts in October and December.

On the other hand, cryptos recovered, with Bitcoin rising to $114,000 and Ether gaining to above $4,180.

The gains in digital assets were broad-based, with most major tokens turning green from a steep selloff earlier this week.

The contrasting trading trends in stocks and cryptos at the start of the week and post Powell's speech underscore the murmurs on Wall Street if crypto traders saw the Fed's dilemma on the rate path ahead of investors of other asset classes.

More importantly, the positive narrative for long-term bets in favor of cryptos remains at play as it was during the flash crash earlier this week as well.

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