As the rate cut cycle continues, the cryptocurrency market may enter a longer period of upward trend.

Editor: Wu Blockchain

At 2 am on September 19th, the Federal Reserve announced a 50bps rate cut, with the upper limit of the interest rate decision at 5%, expected at 5.25%, and the previous value at 5.50%, marking the first rate cut since March 2020. Among the 12 voting members, 11 were in favor, while Miki Bowman, a member of the Federal Reserve Board, voted against the action, preferring to lower the federal funds rate target range by 25 basis points at this meeting. This is also the first time since 2005 that a member has expressed dissent.

The full text of the FOMC statement released by the Federal Reserve is as follows:

Recent indicators suggest that economic activity continues to expand at a moderate pace. Employment growth has slowed, the unemployment rate has risen, but remains at a low level. Inflation is further progressing towards the committee's 2% target, but remains somewhat above.

The Committee is committed to achieving full employment and maintaining inflation at 2% over the long term. The Committee is more confident that inflation will sustainably move towards 2% and believes that the risks to achieving the employment and inflation goals are roughly balanced. The economic outlook remains uncertain, and the Committee is closely monitoring the various risks facing its dual objectives.

Given the progress of inflation and the balance of risks, the Committee has decided to lower the federal funds rate target range by 0.5 percentage points to 4.75%-5%. When considering further adjustments to the federal funds rate target range, the Committee will carefully assess the latest data, evolving outlook, and risk balance. The Committee will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities. The Committee is firmly committed to supporting full employment and returning inflation to the 2% target.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the impact of new information on the economic outlook. If risks emerge that could hinder the Committee's goals, the Committee is prepared to adjust its monetary policy stance in a timely manner. The Committee's assessment will take into account a wide range of information, including labor market conditions, inflation pressures and expectations, as well as financial and international developments.

Members supporting this monetary policy action include Chairman Jerome H. Powell, Vice Chairman John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Lisa D. Cook, Mary C. Daly, Beth M. Hammack, Philip N. Jefferson, Adriana D. Kugler, and Christopher J. Waller. Michelle W. Bowman, who opposed the action, leaned towards lowering the federal funds rate target range by 0.25 percentage points at this meeting.

Powell later stated in his speech, "Taking into account the risks, we are lowering the rate by 50 basis points today, and this adjustment will help maintain the strength of the economy and the labor market." "This decision reflects our increasing confidence that as long as we adjust our policy stance appropriately, the strong momentum in the labor market can be maintained."

Nick Timiraos summarized the key points of Powell's press conference:

• This is undoubtedly a series of rate cuts, although it is a "re-calibration": "We have actually started the rate cut cycle."
• The larger rate cut is mainly about risk management: "We don't think we are behind… you can see this as a commitment that we don't want to fall behind."
• The slowdown in the labor market "is worth paying attention to, and we are closely monitoring it."
• A view that is not entirely dovish: "I think the current neutral interest rate may be significantly higher than before the pandemic, when the actual neutral interest rate may have been negative."

China International Capital Corporation (CICC) stated that the Federal Reserve is more aggressive than expected. Its reaction function has shifted from focusing on inflation to focusing on employment. Although Powell denied victory over inflation at the press conference, he now seems to only focus on employment. The Federal Reserve has a low tolerance for rising unemployment rates, and officials do not want to risk disrupting the bright prospects of a "soft landing." Any unemployment rate exceeding 4.4% in the future could trigger more rate cuts. The Fed's rate cut will support demand expansion, and U.S. economic growth may continue at a relatively high pace. In the medium term, the policy combination of "loose fiscal policy and loose monetary policy" in the United States may increase inflation risks.

Chris Aruliah, Head of Institutional Business at Bybit, stated that historically, a decrease in interest rates usually leads to funds flowing from banks to the stock market, and lower interest rates reduce the returns of traditional investment tools, prompting more investment to flow into higher-risk assets, including digital currencies. The 0.5% rate cut by the Federal Reserve may stimulate the cryptocurrency market in the short term, but it is still crucial to remain vigilant in the environment of economic uncertainty and market volatility. Global economic slowdown, along with various weak economic indicators and geopolitical complexities, are simultaneously affecting investor sentiment.

Greekslive pointed out that the rate cut has driven a comprehensive increase in the cryptocurrency market, while the U.S. stock market has performed poorly. In terms of options, the implied volatility of major tenors has all shown a significant decrease. There are also expectations for a cumulative 100 basis point rate cut at the upcoming meetings on November 8th and December 19th this year. The next rate cut meeting will coincide with the U.S. presidential election, and market volatility may be very high at that time.

The latest report from QCP Capital pointed out that the Federal Reserve announced a 50 basis point rate cut last night and plans to cut rates twice more this year, and four times in 2025. Although Powell has maintained a vague attitude towards the scale and pace of subsequent rate cuts, the market will closely watch the upcoming labor data. Meanwhile, the yield spread between the U.S. 2-year and 10-year Treasury bonds has been inverted since July 2022, but has recently risen to +8 basis points, indicating rising market optimism and risk appetite. In terms of the options market, implied volatility has dropped significantly after the FOMC meeting, with BTC decreasing by 19 volatility points and ETH decreasing by 18 volatility points. After the FOMC meeting, BTC rose from $59,000 to $62,000, and ETH was priced at around $2,400. The decrease in market volatility provides opportunities for investors.

Jeffrey Ding, Chief Analyst of HashKey Group, stated: "The darkness before dawn has passed, and the starting point of a new tide has arrived. The Federal Reserve's 50 basis point rate cut marks its clear concern about the current economic environment, necessitating a larger rate cut cycle. Global economies are currently facing liquidity challenges, and this rate cut decision has injected new vitality into the global financial markets. Bitcoin, as the "digital gold" of the new era, has shown strong performance in this context, breaking through $62,000 in the short term. However, it is not just Bitcoin that has benefited from this, the entire cryptocurrency market is expected to usher in a new round of trends in the loose monetary policy. It is important to note that unlike traditional markets, Bitcoin's performance is more influenced by the flow of U.S. dollar liquidity rather than changes in the U.S. economic outlook. This means that in the future, in a loose monetary environment, Bitcoin may continue to be the preferred asset for investors to hedge against inflation and seek refuge. As the rate cut cycle continues, the cryptocurrency market may enter a longer period of upward trend. Market volatility still exists, but this round of cryptocurrency trends may drive more funds and innovation into this field, pushing the entire cryptocurrency ecosystem into a new development stage.

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