Interest rate cut news has had an impact, and the cryptocurrency market has surged in response, with BTC breaking through $62,500, outperforming US stocks and spot gold.
Author: Climber, Golden Finance
On September 19th, Beijing time, the Federal Reserve officially announced a 50 basis point cut in the federal funds rate to 4.75%-5.00%, the first rate cut since March 2020. In response to the interest rate cut news, the cryptocurrency market surged, with BTC breaking through $62,500, outperforming US stocks and spot gold.
What is particularly anticipated is that multiple institutional experts have indicated that the 50 basis point rate cut in September is just the beginning, and there is still the possibility of further rate cuts within the year, with a cumulative 76 basis point cut expected by the end of 2024.
First rate cut in 4 years, outstanding performance in the cryptocurrency market
The long-awaited rate cut has lasted for four years, but the financial markets have shown mixed performance before and after the rate cut announcement. All three major US stock indexes turned downward, erasing the gains since the Fed announced its rate decision. In addition, spot gold has also completely retraced its gains since the Fed's rate decision. In contrast, the cryptocurrency market surged across the board, with BTC even briefly exceeding $62,500.
Brad Bechtel, Global Head of FX at Jefferies, also stated that the market's expectations were almost evenly split before the Fed's rate decision. Therefore, the Fed's decision clearly surprised half of the market. The Fed is clearly trying to act before the US economy slows down and provide support. However, so far, the market's reaction has not been too crazy, and many reactions have already been reflected in prices.
In response to the Fed's rate cut, the Hong Kong Monetary Authority also announced a 50 basis point cut in the benchmark interest rate to 5.25%, and the government of Louisiana in the United States also agreed to accept Bitcoin payments.
Regarding the rate cut, Fed Chairman Powell stated that the Fed has not declared victory in terms of inflation, but the economic situation has begun to look more optimistic, and this adjustment will help maintain the strength of the economy and the labor market.
In addition, regarding the conditions for the rate cut, Powell stated that there were no signs in the forecast indicating that the Fed was acting hastily; if appropriate, the Fed could speed up, slow down, or pause the rate cuts; if the economy remains robust, we can slow the pace of rate cuts; similarly, if the labor market deteriorates, we can also respond; our forecasts are not plans or decisions, and we will adjust policies as needed; taking into account risks, we are cutting rates by 50 basis points today.
The Fed's rate cut decision has also sparked market discussions, with differing interpretations from institutional perspectives.
"Fed Whisperer" Nick Timiraos stated that the Fed's vote to cut rates by 50 basis points, the first rate cut since 2020, marks a bold start to the rate cut action. 11 out of 12 Fed voters supported the rate cut decision, bringing the benchmark federal funds rate to a range of 4.75% to 5%. Quarterly forecasts released on Wednesday showed that most officials expect at least a 25 basis point rate cut at the November and December meetings. This rate cut decision firmly puts the Fed into a new phase: attempting to prevent last year's rate hike action (which pushed borrowing costs to the highest level in two decades) from further weakening the US labor market.
Nick Timiraos also stated that the Fed is actually making up for lost time. While some Fed officials have argued in recent weeks that the economy has not weakened to the extent that a 50 basis point rate cut is necessary, others have concluded that the cooling of the labor market this summer provides a reason for further rate cuts, as the Fed is actually making up for lost time.
Lindsay Rosner, Head of Multi-Asset Investment at Goldman Sachs Asset Management, stated that the Fed did what the market wanted. The market is still ahead of the Fed, expecting a further 75 basis point rate cut this year (the Fed's dot plot shows 50 basis points). As the unemployment rate and PCE estimates are very close to current levels, the Fed can easily cut rates more than what the dot plot shows.
Economist El-Erian believes that Powell does not want to admit that today's action is a supplement to the lack of rate cuts in July.
Scott Helfstein, Chief Investment Strategist at Global X, stated that the Fed's 50 basis point rate cut may be too aggressive. We have already seen the Fed's 50 basis point rate cut in advance, which may be seen as a concern about the weakening of the economy. However, strong fundamentals in the coming weeks may calm the market and may prevent capital from leaving.
Carlos DeSousa, Portfolio Manager of Emerging Market Debt at Vontobel, stated that the global financing environment will continue to loosen in the coming months, which will help emerging market central banks continue their accommodative policies. This will create space for several emerging market central banks to restart or continue their accommodative cycles that began before the Fed. Lower risk-free rates in developed countries will also reduce external borrowing costs for emerging market issuers, thereby reducing refinancing risks and improving debt sustainability. The accommodative cycle will prompt asset allocators to increase their exposure to emerging markets, as the attractiveness of money market instruments and core developed country interest rates will gradually decline.
Will there be further rate cuts this year
After the Fed's decision to cut rates by 50 basis points, the most discussed topic in the market is when the next rate cut will occur.
The median of the Fed's dot plot shows that the Fed will cut rates by a total of 100 basis points by 2024. After the 50 basis point rate cut in September, there is still an expectation of a further 50 basis point rate cut. The Fed is expected to cut rates by another 100 basis points in 2025, the same as the expected rate cut magnitude in the June dot plot.
The trend in US interest rate futures suggests a cumulative 76 basis point rate cut by the end of 2024, and a cumulative 196 basis point rate cut by October 2025.
US Senator Elizabeth Warren criticized Powell (who has repeatedly criticized Powell for raising rates too quickly and being too lenient on bank regulation): "This rate cut once again shows that Powell has acted too late in lowering rates. The Fed has finally changed its policy direction and is beginning to follow its dual mandate of prices and employment. Rate cuts mean relief for consumers and aspiring homeowners. Further rate cuts are needed."
CME's "FedWatch" states that the probability of a 25 basis point rate cut by November is 62.2%, and the probability of a 50 basis point rate cut is 37.8%. The probability of a cumulative 50 basis point rate cut by December is 36.6%, and the probability of a cumulative 75 basis point rate cut is 47.8%; the probability of a cumulative 100 basis point rate cut is 15.6%.
"New Bond King" Gundlach stated that the long-term bond market does not want the Fed to adopt aggressive easing policies; the Fed is not falling behind the curve as it did before; after the US election, there is a greater possibility of a 50 basis point rate cut in November; current data supports Powell's statement that the economy has not shown significant pressure.
Adam Button, Chief Currency Analyst at financial website Forexlive, stated that Powell has always been dovish during his tenure. It is clear that Powell does not want to fall behind the curve in the rate cut cycle and has decided to take preemptive action. He explicitly stated at the Jackson Hole conference that he does not want to see further deterioration in the labor market, and it is expected that there is a possibility of another 50 basis point rate cut in November if employment data shows further weakness. Until recently, the market still believed in the "dollar exception theory," believing that US economic growth would outperform, and interest rates would remain higher than in other regions.
Now it is clear that the Fed's rate cut speed will be as fast as that of other G10 central banks, or even faster. Therefore, if the Fed continues to do so, there is still a lot of room for the dollar to fall. Overall, this rate cut is a bold move, and I believe history will judge it to be correct. The bond market implies that the struggle against inflation has been won, and there is room for rates to fall all the way to 3% before the Fed has to stop and think.
Tom Hainlin, Senior Investment Strategist at US Bank, stated that the Fed's rate cut is aimed at protecting employment, and two more rate cuts can be expected in the future. We don't have a particularly strong opinion on whether the rate cut will be 25 basis points or 50 basis points. So we won't be surprised. Looking ahead, at least from now until the end of the year, we should expect two more rate cuts. As inflation begins to get closer to the target, it is not surprising that Powell is focusing on the employment mission, and he is concerned about potential downside risks in the labor market.
There are signs that the labor market may be weaker than the data shows. Therefore, this seems to be a kind of insurance for us relative to the labor market, to prevent the unemployment rate from rising and to maintain the good operation of the economy.
Conclusion
The Fed's rate cut has brought new hope to the financial markets, especially the cryptocurrency market. The widespread outstanding performance of cryptocurrencies led by Bitcoin once again proves the vitality of emerging assets. It is particularly anticipated that multiple institutional perspectives are generally optimistic about further rate cuts within the year, which also means that a new cycle for the cryptocurrency market is already on the way.
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