Here's Why a Fed Rate Cut Could be Great News for XRP

Key Points

• The Federal Reserve is considering a rate cut this month.

• The market seems to think the cut is a slam dunk, but it might not be.

• If it occurs, XRP could experience a slightly stronger tailwind.

• 10 stocks we like better than XRP ›

If the Federal Reserve trims interest rates this month as many in the markets are expecting, it will have quite a few implications for cryptocurrency -- and they might be positive.

One question for investors is whether it will translate into something durable for XRP (CRYPTO: XRP) rather than just a short pop or wobble, if it happens. Here's how that could play out.

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Lower rates lead to higher risk appetites

When the Fed eases monetary policy, it aims to loosen overall financial conditions by lowering short-term interest rates and influencing the sovereign yield curve that anchors returns for riskier assets. In English, cheaper money tends to make risky investments more attractive and safe assets less compelling, because the yield on the safest assets, namely U.S. Treasuries, is lower.

Crucially, the probability of an impending cut is high, even if it isn't as guaranteed as many are saying. Fed Governor Christopher Waller said on Aug. 28 that he favors starting rate reductions this month, citing softer labor dynamics. Markets are broadly aligned with that view, and subtler cues from other Fed leaders suggest that Waller is not alone.

Why does this matter to XRP? Because, as mentioned previously, lower policy rates reduce the attractiveness of low-yielding safe assets and raise investors' tolerance for risk -- and as a cryptocurrency, XRP is the spitting definition of a risky growth asset.

There is also the simple opportunity cost effect. When Treasury bills pay less, the bar to beat for holding a volatile asset falls. So investor tend to buy more volatile assets, like XRP. Furthermore, financial institutions have been inching allocations to digital assets higher, and easier policy can accelerate that trend from testing to committing.

Put together, a cut does not ensure a dramatic growth spurt for crypto nor XRP specifically. But it tilts the playing field toward assets that benefit from fresh liquidity and a reach-for-yield mindset. XRP sits squarely in that lane, and there's reason to believe that capital allocators will prefer it over alternatives.

Why XRP can turn cheaper money into real usage

XRP's investment thesis is based on more than falling interest rates.

The XRP Ledger (XRPL) was built for fast settlement of cross-border payments and for efficient asset movements, with features that enterprises and institutional investors care about. That includes tools like payment channels, which enable high-throughput settlement, and constructs intended to support regulation compliance for asset issuers.

Ripple, the company that issues XRP, has an On-Demand Liquidity (ODL) platform, which offers a good example of how lower funding costs can magnify real activity. ODL uses XRP as a bridge asset to move value across currencies quickly, reducing the need for transactors to have pre-funded accounts in different countries. When balance sheet cash is less rewarding because policy rates are falling, the incentive to streamline working capital and improve settlement rises, making ODL-style flows more attractive.

Put differently, the mechanism is that if lower rates nudge banks, payment companies, and asset managers to expand their pilots or scale existing programs with XRP, more value sits on or traverses the ledger. Increased utility can support demand for XRP as a settlement asset, even if the price path is bumpy. In theory, that positive feedback loop is stronger when the cost of capital falls and executives are more willing to green-light new initiatives.

But, there are caveats to know.

First, a cut would likely arrive because risks to growth have risen. If the economy slows too much, risk appetite can and will evaporate despite easier policy. Remember, when the economy completely crashes or is in free fall, the first thing the Fed does is to cut rates, and nobody would say that such circumstances favor investors buying risky assets.

Second, XRP's utility hinges on its adoption, not headlines. Assuming the Fed eases interest rates and liquidity improves, XRP can benefit, but investors should expect a multi-quarter or multi-year story to play out, not a one-day miracle after an announcement.

If the Fed cuts this month, XRP has a cleaner runway than it has had in years to prove its case in the real economy. For long-term holders, the playbook here is to own assets with real use cases that get more valuable as the cost of capital falls and as institutions broaden their digital asset footprint. XRP's payment rails, throughput, and enterprise-friendly features fit that bill, and eased Fed monetary policy could be the spark that moves more experimentation into production.

Just recognize that monetary policy can zigzag with the data if you plan to buy XRP in advance of the Fed's announcement.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends XRP. The Motley Fool has a disclosure policy.