The Fed Chairman "poured cold water" on the March rate cut, and Bitcoin fell below $42,500

Crypto markets plunged on Wednesday, with Bitcoin (BTC) falling below $42,500, as hawkish comments from Federal Reserve Chairman Jerome Powell doused investor expectations for an imminent rate cut in March.

Fed: As inflation approaches 2%   It is not appropriate to cut interest rates before "more confidence"

After the first Federal Open Market Committee meeting in 2024, the Federal Reserve kept the benchmark federal funds rate range unchanged at 5.25%-5.5%, in line with market expectations.

Market participants were more concerned about clues about when the Fed might start cutting interest rates, which before the meeting many observers expected to happen as early as its next meeting in March.

But the Fed said in its policy statement today that it would not be appropriate to cut interest rates until it is "more confident" that inflation is close to its 2% target.

Powell directly poured cold water on the issue at the press conference: "Based on today's meeting, I want to tell you that I think it is unlikely that the Committee will reach the confidence level to do so at the March meeting. This remains to be seen. March may not be the most likely [rate cut] scenario ."

The Fed's decision on when to cut interest rates is a delicate balance, with several FOMC members raising the risk of waiting too long to cut rates, arguing that it could hurt a strong labor market. On the other hand, there are risks of acting too hastily, which could reignite inflation.

When asked about the timetable for a rate cut, Powell said at a press conference that labor market data and inflation data will still be data worth paying attention to.

“If we saw ... unexpected weakness in the labor market in particular, that would certainly weigh on faster rate cuts,” Powell said. “Certainly if we saw stickier or higher inflation, those kinds of things would support moving later.”

Immediately after the comments were made, risk assets including cryptocurrencies fell sharply. BTC fell from the intraday high of $43,700 to $42,300, down 2.3% in the past 24 hours.

Other major currencies such as ETH, Cardano ’s ADA, Avalanche ’s AVAX, and Polkadot ’s DOT fell by 3%-4%, while Solana ’s SOL fell more than 6% on the day, falling below $100.

In the traditional financial markets, the S&P 500 index recorded its biggest single-day drop since September 21 last year, the Nasdaq recorded its biggest single-day drop since October 25 last year, and the Dow Jones Industrial Average recorded its biggest single-day drop since December 20 last year.

Will the rate cut be postponed until after May?

“The market is getting ahead of itself on interest rates,” Alex Krüger , macro analyst and co-founder of Asgard Markets, said in the X post. “Rate cuts start in May or June, not March.”

David Kelly, chief global strategist at JPMorgan Asset Management, said the Federal Reserve has set a timetable for rate cuts starting in June.

“It seems to me that they are looking at June, September, December – three rate cuts this year – assuming the economy continues to grow and there doesn’t seem to be any signs that the U.S. economy is going to collapse and go into recession anytime soon,” he told CNBC following the Fed’s statement. “They’re just going to see the balance of risks tilt more toward sticky inflation than a recession before they see more damage (or potential damage) to the economy from a big run-up in the market.”

“The decision on when to start cutting rates is arguably a more important and nuanced decision than raising them, so economic data over the next two months will be critical,” said Oliver Rust, head of product at economic data aggregator Truflation.

“Any hawkish talk about higher interest rates lasting longer than expected could trigger a stock market correction, leading to capital outflows from risk assets such as Bitcoin ,” said Ruslan Lienkha, head of markets at Web3 fintech platform YouHodler.

Bitcoin will become more sensitive to interest rate decisions

However, Swissblock analysts said in a market report on Wednesday that Bitcoin’s downside may be limited as it appears to be consolidating between $44,000 and $42,000 with no clear direction. The $42,000 area and levels below $40,000 could serve as key support levels for the price where buyers could step in, the report added.

James Butterfill, head of research at CoinShares , said Bitcoin will become more sensitive to interest rate decisions as financial institutions increasingly participate in the market through multiple spot Bitcoin ETFs.

Butterfill said: "Bitcoin prices have realigned with futures market interest rate expectations, suggesting that Bitcoin will become more sensitive to interest rate-sensitive macro data such as employment and the CPI, especially as excitement around ETFs wanes."

In fact, market bets on a rate cut in March have fallen from about 65% before the Fed decision to 34.5% now, according to data from CME Group’s FedWatch tool.

Upcoming data could give policymakers more accurate information on their decisions, with a key U.S. manufacturing index due on Thursday, the January jobs report on Friday and two inflation reports ahead of the Fed's March meeting.