Finance & Business

Bitcoin Drops 2% Following Fed’s First Emergency Rate Cut Since 2008

Bitcoin prices slid Tuesday after the U.S. Federal Reserve announced an emergency cut in interest rates to counteract risks to the economy from the spreading coronavirus. 

The largest cryptocurrency by market value was down 2.2 percent to $8,722 as of 15:28 UTC (10:28 a.m. ET). Prices had surged 4.6 percent on Monday, rising alongside U.S. stocks as traders in traditional financial markets bet the Fed would soon cut rates to address the economic impact of the contagion. Efforts to contain the outbreak have disrupted travel and business activity while threatening consumer confidence.

The Federal Reserve, led by Chair Jerome Powell, cut its benchmark short-term interest rate by 0.5 percentage point to a range between 1 percent and 1.25 percent. The U.S. central bank’s monetary-policy committee hadn’t been scheduled to make its next decision on interest rates until March 18. This marks the first emergency rate cut since the financial crisis in 2008.

“The coronavirus poses evolving risks to economic activity,” the Fed said in a statement on its website. “The committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

Nonetheless, an hour after the Fed’s rate cut, the S&P 500 index was down 1 percent.

Despite a belief among some investors that bitcoin (BTC) should trade as a safe-haven asset akin to gold or U.S. Treasury bonds, the cryptocurrency’s price had tumbled recently along with riskier assets like stocks as traders scrambled into cash. 

Economists with the Organization of Economic Cooperation and Development said Monday in an assessment that the coronavirus contagion likely will shave 0.5 percentage point off of projected 2020 global growth, from an “already weak” 2.9 percent. 

Global authorities, including the Fed as well as the Bank of Japan, International Monetary Fund and World Bank, said they would act as needed to help offset any lasting economic damage from widespread travel cancellations, quarantines and factory disruptions.  

Trading in the Chicago Mercantile Exchange’s market for futures contracts on the Fed’s benchmark interest rate had moved over the past week to reflect a 100 percent chance of a 0.5 percentage point cut by the central bank’s March 18 meeting.

The Fed started raising interest rates in 2015 as the economy recovered from the 2008 financial crisis. But the central bank abruptly reversed course last year and started cutting rates as the stimulus faded from President Donald Trump’s late-2017 tax cuts.

The crypto-focused investment firm Arca, based in Los Angeles, wrote Monday in an emailed analysis that “surprise” central bank actions have now become “expected” by traders whenever markets are rattled.

They are “no longer surprises,” Arca said. “In fact, they are outright demanded. This is the definition of moral hazard.”

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