Fed Highly Likely to Not Raise Interest Rates in September: Will Cryptocurrencies Rise or Fall?

Last week (9/11-9/17), cryptocurrencies experienced fluctuating indicators with a initial decline followed by a rebound.

The total market capitalization dropped to $1 trillion on September 11, reaching its lowest point since March this year. However, it later saw an oversold bounce, and the current high reached $1.06 trillion, representing a 6% increase.

The market sentiment index also followed a similar pattern of decline followed by a rebound. It dropped from 42 to 38 and is currently bouncing back to 44, forming a W-shaped trend within the narrow range of 38-42.

Cryptocurrency Total Market Cap (Yellow), Fear Greed Index (Blue) Trend from 2023.1.1 to 2023.9.17; Source: MacroMicro.

After a continuous decline over the past half-month, mainstream coins showed signs of improvement and experienced a rebound. Bitcoin Cash (BCH) performed the best, rising by 14%, followed by Litecoin (LTC) with an 8% increase.

Stellar (XLM) performed the worst, shifting from a rise to a fall, with a 10% decline, followed by Avalanche (AVAX) with a 1% decrease.

Price fluctuations of major cryptocurrencies from 2023.9.11 to 2023.9.17, Source: MacroMicro.

Additionally, Bitcoin's price increased by 5% with a 0.5% rise in market share, currently at 49.1%. Ethereum's (ETH) price rose by 5%, while its market share decreased by 0.2%, remaining at 18.6%.

According to the data, there is a 99% probability that the Federal Reserve will not raise interest rates in September, maintaining rates between 5.25% and 5.50%. The probability of a 25 basis point rate hike to reach 5.50%-5.75% is only 1%. So, what does no interest rate hike signify?

Probability of the Federal Reserve target interest rate in September 2023; Source: CME.

Not raising interest rates implies that the Federal Reserve believes the current economic conditions do not require further monetary tightening measures. Therefore, it decides to maintain the current level of interest rates, temporarily avoiding adjustments in borrowing costs. This measure will have specific impacts, including:

- Stimulating economic growth: Low interest rates encourage individuals and businesses to borrow and invest, promoting employment opportunities and economic growth.

- Encouraging consumer spending: Low interest rates incentivize consumers to purchase goods and services, boosting consumption expenditure.

- Supporting capital markets: Low interest rates often prompt investors to shift funds from fixed-income assets such as banks towards volatile assets like stocks and real estate.

As mentioned earlier, not raising interest rates stimulates the flow of funds from fixed-income assets to volatile ones. Cryptocurrencies can be considered as the most volatile assets at present. Thus, no interest rate hike, especially a rate cut, is positive for cryptocurrencies as it attracts new funds and drives prices higher.

In fact, the principle behind this is straightforward. If an interest rate hike leads to higher rates, investors choose deposits because they offer increased returns under similar risks. Conversely, if a rate cut leads to lower rates and lower returns, investors tend to abandon low-yielding bank deposits and opt for potentially higher-yielding assets like cryptocurrencies.

It's important to note that the current probability of no interest rate hike is 99%. Although it indicates a high likelihood of the Federal Reserve not raising interest rates, it is still a predictive outcome, and the actual decision will be announced on September 21. Therefore, until the official announcement is made, other possibilities such as a 25 basis point rate hike cannot be completely ruled out.

If there is an unexpected 25 basis point interest rate hike, borrowing rates will increase, and funds are likely to flow into fixed assets rather than volatile assets, which could have a negative impact on cryptocurrencies. This could potentially cause a downward market volatility.

On September 11th, Bitcoin experienced a bearish candlestick, dropping to a low of $24,944, approaching the June low. Fortunately, the next day (September 12th), positive news emerged - U.S. asset management company Franklin Templeton submitted a BTC spot ETF application to the SEC. Bitcoin responded with an upward movement, forming a strong bullish trend with a large bullish candlestick engulfing the previous bearish one.

Following this, the bulls continued to buy, driving the price of Bitcoin higher. After three consecutive days of gains, it has been consolidating around $26,500 in recent days, with the overall upward trend still intact.

Bitcoin daily price chart, Source: TradingView.

After a brief consolidation, Bitcoin is highly likely to continue its upward trend, with the next resistance level at $28,000 posing some obstacles. Whether it can break through and rally above $30,000 will depend on the Federal Reserve's interest rate decision. If there is no interest rate hike, the probability of further upward movement is higher.

However, if an unfavorable interest rate hike occurs, Bitcoin is likely to quickly reverse its course downwards, so it is crucial to pay attention to the interest rate decision this week.