The Fed rate cut will narrow the ether-Fed yield differential in favor of ETH.
Ether could outperform bitcoin following an interest-rate reduction.
The Ethereum blockchain's native token, ether (ETH), a yield-bearing coin that has fallen out of investor favor, could surge Thursday if the Federal Reserve delivers an interest-rate reduction, as expected.
Ether, the second-largest cryptocurrency by market value, has risen 23% this year, a meager gain compared with the 77% surge in bitcoin (BTC), the largest.
At $2,800, the ether price is well below its 2021 peak of $4,868. Bitcoin, meantime, is trading around $74,000, close to the record high hit on Wednesday as Donald Trump neared U.S. election victory.
One reason for the underperformance is the U.S.'s elevated interest rates, which have dented ether’s appeal as an internet bond, offering a fixed-income-like yield in exchange for staking the token. The annualized staking yield has consistently held below 4% for the past two years, much less than the 5% benchmark U.S. interest rate.
The Federal Open Market Committee (FOMC) is expected to cut the borrowing cost by 25 basis points to 4.5%, having delivered an outsized rate reduction of 50 basis points in September.
In other words, the ether-Fed yield differential is set to narrow in favor of ether, potentially galvanizing demand for the cryptocurrency. The victory of pro-crypto candidate Trump in the presidential election has already set the stage for a rebound in ETH and DeFi coins.
Ether is currently looking to scale the trendline characterizing the downtrend from May. The rate cut may confirm the breakout, opening doors for a rally above $3,000.
Note that as per the Fed funds futures, interest rate traders have already priced in the rate cut, meaning the so-called easing may not lead to a significant positive reaction in macro assets like BTC.
Traders, however, should watch out for signs of Fed angst over Trump’s supposedly inflationary policies as that would mean slower rate cuts or even a pause in the months ahead.