In the past two days, the difficulty of the assignments has risen sharply. I actually think that understanding the connection between interest rate cuts and the economy can significantly lower the difficulty. For example, many friends asked today why the probability of an interest rate cut in September has increased, but the risk market is declining. The key point is that interest rate cuts cannot be discussed in isolation; they must be considered in conjunction with the state of the U.S. economy. The current U.S. economy is in a downturn, and in such a situation, an interest rate cut is likely the Federal Reserve's acknowledgment that the economic decline is difficult to stop, and it can only be delayed through rate cuts.

Let’s take an example: friends who have had teeth pulled know that anesthesia is needed to avoid excessive pain. An interest rate cut is like anesthesia. If it is administered before the tooth extraction and in a reasonable dosage, even during the extraction, you won’t feel pain. If you start to feel some discomfort, the doctor can give you another shot of anesthesia to ensure you feel no pain. This effective anesthesia is what we call defensive interest rate cuts.

However, if the doctor initially administers the wrong dosage of anesthesia, causing you to feel pain, and then gives you more anesthesia, your pain will slowly diminish, but you will still feel pain. If the doctor again administers the wrong dosage and you feel pain during the next extraction, you will need more shots. This situation represents a "closing the barn door after the horse has bolted" type of interest rate cut, which has already impacted the economy, and further cuts will be hard to resolve the economic issues in a short time.

In simpler terms, an interest rate cut during a strong economy means that the risk market can still move forward safely, while an interest rate cut during an economic downturn signifies that the pain of recession has already occurred. Even with anesthesia (interest rate cuts), the market will still feel deeper unease. Even the expectation of a 50 basis point cut in September is not enough.

Since the Jackson Hole annual meeting, this has been the reaction. Powell is concerned about the economic downturn and has stated that if the economy declines, it can indeed consider cutting rates, but this is not good news for the market because you are already in pain, and trying to alleviate it means the pain will still persist for a while. This is why the market is quite conflicted; on one hand, rate cuts can indeed provide relief, while on the other hand, there is concern that even rate cuts cannot eliminate the pain (economic downturn).

Looking at Bitcoin's data, the recent prices have been fluctuating slightly, so investors are somewhat fatigued, and the turnover is not high. The short-term investors are mainly engaged in speculation, while the changes among earlier investors are not significant, indicating that the impact of recession is more on short-term investors, while long-term investors show no signs of panic, whether due to cost factors or psychological factors.

This week has passed in a muddled manner. The probability of an interest rate cut in September is indeed high, but the market's understanding is even more important. If the market believes that the current rate cuts can help alleviate the pressure of economic decline, it will be more optimistic; conversely, it will be more pessimistic. The one who can most drive the sentiment should be Trump, as the current game is between Trump and the Federal Reserve.

Now, looking at the market sentiment after the U.S. stock market closed, it has eased somewhat, which is a good thing for the weekend. If the market is too excited, the volatility will be greater when liquidity is low over the weekend, which would be uncomfortable. Right now, we just hope for no major fluctuations in sentiment and that we can have a good weekend.

This article is sponsored by #Bitget ｜ @Bitget_zh

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