From the tariff storm to the CPI surprise: How will the Fed’s interest rate cut trigger a global asset frenzy?

Author: SuperEx

Compiled by: Vernacular Blockchain

Recently, global markets have been shocked by the wild volatility of the U.S. stock market. After the market plunged due to the news of "reciprocal tariffs", the White House announced a 90-day suspension of tariffs on certain countries, and the market quickly reversed and soared.

The Dow Jones Industrial Average surged more than 2,900 points, or 7.87%, its biggest one-day gain since March 25, 2020. The S&P 500 surged 9.52%, its biggest gain since Oct. 29, 2008, while the Nasdaq surged 12.16%, its second-biggest one-day gain in history.

The “Big Seven” tech stocks soared across the board, with their combined market value surging by $1.85 trillion in just a few hours.

“The U.S. stock market is as volatile as altcoins, and the world has become a giant pump-and-dump game.”

This rhythm is familiar, yes - this is exactly the violent price fluctuations we often see in the altcoin market. Many market analysts can't help but exclaim:

However, the surprises from the United States did not stop there. The CPI data for March was far below expectations: the year-on-year growth rate was only 2.4%, lower than market forecasts, and even fell by 0.1% month-on-month. The core CPI was also disappointing, reaching a four-year low. The unadjusted core CPI in March increased by 2.8% year-on-year, falling for the second consecutive month, the lowest level since March 2021, and lower than the market expectation of 3.0%.

These two sets of data not only surprised the market, but also prompted investors to reassess the Fed's policy outlook. The market reacted quickly:

Spot gold initially rose $6 before retreating;

The US dollar index fell 20 points in the short term;

GBP/USD extended its intraday gains to 1.00%.

Faced with such data, many market analysts now believe that a June rate cut by the Federal Reserve is almost certain.

Wall Street Journal economist Harriet Tory pointed out that under normal circumstances, a slowdown in year-on-year CPI growth would be seen as good news.

This is naturally good news for the crypto market. With the decline of the Federal Reserve's benchmark interest rate, the crypto market may usher in a new round of value revaluation.

The relative pricing effect of low risk-free rates

The yield on the 10-year U.S. Treasury bond has fallen from a high of 4.8% in 2023 to 4.28% (the recent low was 4.18%, followed by a rebound of 10 basis points). The decline in the return on traditional fixed-income assets has driven capital flows to high-risk assets. Taking Bitcoin as an example, its correlation with Treasury yields in 2023 was as low as -0.73. In a rate cut cycle, the opportunity cost of holding crypto assets is significantly reduced, thereby increasing its attractiveness. According to the Goldman Sachs model, for every 25 basis point rate cut, the market value of Bitcoin may increase by 6-8%.

Strengthening the “Digital Gold” Narrative

The 90-day correlation between Bitcoin and gold has risen from 0.12 to 0.35 in 2023, reaching 0.68 during the Silicon Valley Bank crisis. When interest rate cuts coincide with rising recession risks, the safe-haven value of crypto assets may be reassessed. A report from Grayscale pointed out that for every 1% drop in real interest rates, Bitcoin's valuation baseline may increase by 15%.

Liquidity injection from rate cuts

Historically, the Fed's rate-cutting cycles have often been accompanied by broad-based increases in asset prices. With easy liquidity and lower capital costs, investors' appetite for risky assets has increased - this is particularly evident in the crypto market.

As a high-volatility, high-risk tool, crypto assets are extremely sensitive to changes in liquidity. When the Federal Reserve releases monetary easing signals, idle capital tends to pursue higher returns, and crypto assets with high return potential quickly become the focus.

The Economic Logic of Deflationary Tokens

The scarcity premium of fixed supply cryptocurrencies has become increasingly prominent amidst the backdrop of expected fiat currency debasement. This built-in deflationary property adds to its inflation-fighting appeal during rate cut cycles.

Catalyst for institutional adoption

Interest rate cuts amplify the phenomenon of "asset shortage"

Lower interest rates reduce the yields of traditional financial markets (such as bonds, money market funds), creating pressure for institutions to re-allocate. Long-term investors such as insurance companies, pension funds and family offices may shift some of their capital to growth emerging markets.

As regulatory infrastructure such as ETFs, custody and auditing matures steadily, crypto assets are becoming more and more viable for compliant investments. In the context of sluggish returns in traditional markets, institutions may include Bitcoin and Ethereum in diversified portfolios.

Crypto ETFs are in sync with the rate-cutting cycle

By the end of 2024, the United States has approved the listing of multiple spot Bitcoin ETFs, which is a critical moment for institutional funds to openly enter the crypto market. If interest rate cuts coincide with the ETF boom, the dual momentum of institutional inflows and macro liquidity expansion may further amplify the upside potential of the crypto market.

The crypto ecosystem is seeing a resurgence in on-chain activity

DeFi market recovery

During the interest rate hike cycle, DeFi platforms found it difficult to compete with the low-risk returns of U.S. Treasuries, resulting in a decline in the total locked volume (TVL). As the risk-free rate of return declines, DeFi returns become attractive again, attracting capital inflows.

Leading protocols such as Compound, Aave, and Lido have shown signs of TVL recovery. With stable on-chain lending rates and widening stablecoin spreads, capital efficiency has increased - improving liquidity in the DeFi ecosystem.

NFT and GameFi markets gain renewed attention

The interest rate cuts free up capital and reignite users' enthusiasm for high-volatility, high-engagement assets such as NFT and GameFiToken. Historically, NFT market activity has usually lagged behind Bitcoin's rise and exploded in the second phase of the bull market. The Fed's interest rate cuts may open up new upside for these application layer assets.

summary

In short, the Fed's rate cut has laid the macro foundation for a new round of upward cycle in the crypto market. From liquidity injection, capital reallocation to institutional entry, on-chain activities and financing environment - the rate cut provides a systemic tailwind for the crypto industry.

As the Federal Reserve opens the floodgates of liquidity, crypto assets are evolving from marginal speculative assets to mainstream macro-allocation tools. This transformation is driven by traditional financial giants and technological breakthroughs, accompanied by a deep reshuffle of the market and reconstruction of value.

Of course, the market will not transform overnight. Regulatory transparency, technical infrastructure and security challenges still need to be addressed. But driven by the dual engines of "monetary easing + asset innovation", the crypto market may usher in a new structural rise in the coming year. For investors and builders, understanding the policy cycle and market rhythm will be the key to dealing with bull and bear markets.