The BlackRock Investment Institute has issued a cautionary note, advising against relying on the Federal Reserve to significantly reduce US interest rates to the extent anticipated by the bond market. According to BlackRock, the US economy remains robust and inflation levels are still elevated, making substantial rate cuts unlikely.

Market traders are currently forecasting a total of 120 basis points worth of rate reductions within this year alone. Furthermore, they are projecting even more considerable cuts—up to 250 basis points—by the conclusion of 2025. This would lower the current interest rate range of 5.25%-5.5% to approximately 2.8%-2.9% by the end of the next year. However, BlackRock contends that these expectations are exaggerated and that the markets are bracing for rate cuts reminiscent of those seen during previous recessions. Yet, BlackRock does not foresee such extensive reductions.

The institute identifies several contributing factors—such as an aging workforce, budget deficits, and geopolitical tensions—that are likely to sustain higher levels of inflation and interest rates in the short to medium term. As the world’s largest asset manager, BlackRock also expressed a bearish outlook on short-term US Treasuries. Bond yields are mirroring these high expectations for rate cuts, but if the reductions are not as deep as anticipated, bond performance may falter.

Conversely, BlackRock maintains a bullish stance on stocks, especially those associated with artificial intelligence (AI). They recognize substantial long-term growth potential in AI, which is why they are overweight on US equities.

Investors remain skeptical about whether potential rate cuts will positively impact the crypto market, notably Bitcoin. Currently, Bitcoin has dipped about 3%, standing at $58,158 after recently surpassing $60,000. Similarly, Ether has dropped roughly 4% to $2,302. Typically, lower interest rates benefit the crypto market by reducing borrowing costs and increasing liquidity, thereby encouraging risk-taking among investors.

Shannon Saccocia, Chief Investment Officer at Neuberger Berman, notes that a significant rate cut from the Fed—such as a 50 basis point reduction—could indicate that the economy is in worse shape than previously thought. Such a scenario might prompt investors to abandon risky assets.

In 2019, consecutive rate cuts by the Fed led to a strong rally in Bitcoin. However, that period was characterized by much more optimistic investor sentiment compared to the current climate. During earlier easing cycles, such as those in 2000-2003 and 2007-2009, markets frequently misjudged the depth of rate cuts and reacted negatively.

Gautam Chhugani, an analyst at Bernstein, suggests that smaller rate cuts by the Fed could present opportunities for the crypto market. For instance, stablecoin lending yields could exceed 5%, potentially drawing institutional investors back into decentralized finance (DeFi) markets, particularly on the Ethereum network. Nevertheless, even smaller cuts are not guaranteed.

Dave Birnbaum, Vice President of Product & Marketing at Coinbits, emphasizes that while lower rates generally benefit Bitcoin, the underlying reasons behind these cuts are crucial. Arthur Hayes, a long-time Bitcoin advocate and founder of BitMEX, highlighted that the Reverse Repo Program (RRP) currently offers a yield of 5.3%, outpacing any T-bill with less than a one-year maturity. Consequently, money market funds are shifting from T-bills to the RRP, which negatively impacts liquidity. Since Jackson Hole, RRP usage has surged by $120 billion, a trend Hayes expects to continue as long as T-bill rates remain lower than RRP yields.

Adding to these financial concerns, political events are also affecting the crypto market. The recent market downturn is largely attributed to a second assassination attempt on Former President Donald Trump. The upcoming election’s impact on the markets remains uncertain. Trump has voiced support for crypto, whereas his opponent, Democratic Vice President Kamala Harris, appears indifferent. Analysts at Bernstein and Bitfinex predict that if Kamala Harris wins the election, Bitcoin could plummet below $40,000. Conversely, a Trump victory could drive Bitcoin to reach new all-time highs before the year concludes.