The Impact of Fed Interest Rate Decisions on Bitcoin: How Dovish Signals Improve Crypto Outlook

This week, all eyes in the market are on the Federal Reserve announcement that will determine the direction of risk assets, especially bitcoin and the US dollar. The significance of Chairman Powell’s press conference lies in the nuances implied in every word—whether the pause in rate cuts indicates a hawkish or dovish stance will improve or worsen crypto market sentiment. If Powell signals a dovish outlook, it could significantly boost bitcoin and stocks, whereas a hawkish interpretation might weaken these assets.

Based on CME FedWatch data until last Friday, the probability of the Fed maintaining interest rates stable in the range of 3.5%-3.75% reaches 96%—a very solid figure already fully priced in by the market. This decision is consistent with Powell’s December statement, which affirmed that the voting committee will not consider additional cuts until 2026. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis with voting rights, also recently stated that it is too early to cut rates again. So, Wednesday’s decision is not about a surprise cut—it’s about what Powell signals regarding the future.

Dovish Signals vs Hawkish Stance: Which Improves Bitcoin Prospects?

A critical question for traders is how to interpret this pause. In a hawkish scenario, Powell would emphasize ongoing inflation risks and make future rate cuts less likely—this would pressure risk assets and push bitcoin lower. Conversely, dovish signals would suggest that the pause is temporary and that the Fed is ready to cut rates again in the coming months, which would significantly improve crypto prospects.

Morgan Stanley anticipates that the Fed will maintain language in the statement that mentions “considering the timing and extent of additional adjustments”—language that preserves the option for monetary easing. Such a statement would acknowledge economic resilience while keeping rate cuts on the table. This is the sweet spot for risk assets.

It is also important to monitor the number of dissenting votes in the voting committee. If more dissenters favor the status quo (as expected from Stephen Miran, who is pro-rate cuts), this would strengthen the dovish argument and significantly improve the odds of future cuts. Most observers, except JPMorgan, expect the Fed to implement 1-2 rate cuts throughout 2026—predictions that would improve bitcoin sentiment if dovish signals are confirmed this week.

Intersection of Trump Policies, Fed Independence, and Dollar Impact

Powell will face a barrage of questions regarding Trump’s policy moves that directly affect macroeconomics. Trump has instructed his team to buy $200 billion worth of mortgage bonds, claiming this will lower interest rates and monthly payments. Additionally, a new executive order requires large institutional investors to abstain from purchasing single-family homes. Observers agree these measures are inflationary in the short term.

Powell’s explanation of the status quo decision, according to ING analysis, will send strong signals about the dollar outlook. If Powell appears confident in the current financial conditions, it will reinforce the dollar against low-yield currencies like yen and euro—indirectly pressuring bitcoin due to its pricing dominance in the greenback. However, if Powell signals uncertainty or concerns about growth outlook, it opens the door for downside movement in the dollar and upside potential for crypto-denominated assets.

Another likely question concerns the DOJ investigation into Powell personally—claimed by Trump as retaliation for Powell not cutting rates as desired. How Powell responds will influence confidence in Fed independence, a sensitive issue for market stability.

Onchain Metrics and Support Levels: Technical Data Shaping Outlook

While macro focus captures attention, on-chain data also provides crucial insights. About 63% of total bitcoin wealth invested is at a cost basis above $88,000—relatively high given recent price fluctuations. Supply concentration data shows strong resistance clusters between $85,000-$90,000, combined with thin support below $80,000.

Simple implication: dovish signals from Powell will provide psychological support for holders and improve selling pressure at these support levels. Conversely, hawkish interpretation will likely trigger stop-loss cascades and test lower support zones.

Conclusion: Prepare for Volatility

The true significance of the Fed announcement on Wednesday is not the interest rate decision—virtually certain to remain unchanged—but the framing by Powell and signals about future trajectory. Dovish commentary will significantly improve the outlook for bitcoin and other risk assets, while a hawkish stance will create headwinds. Traders should be prepared for substantial volatility this week, focusing on the exact wording in the statement and the tone during the Q&A session. For crypto investors, dovish signals are the most potent catalyst to improve short-term bullish prospects.