How the Fed is responding to the market fiasco and what it means for crypto

Author: Thomas Carreras, DL News; Translated by: Tao Zhu: Wuzhu, Golden Finance

Global markets fell sharply on Monday, panicking investors and sparking speculation that the Federal Reserve may need to step in quickly.

Jeremy Siegel, chief economist at WisdomTree, told CNBC: "I am calling for an emergency 0.75% cut in the federal funds rate, and another 0.75% cut next month at the September meeting - that's the minimum."

"The current federal funds rate should be between 3.50% and 4%," he added - not between 5.25% and 5.50%.

Siegel's comments came as Japan's two main stock indexes, the Nikkei and the Topix, closed down more than 12%, their biggest one-day losses since the 1987 stock market crash.

U.S. stock indexes were also hit hard, with the S&P 500 and Nasdaq falling 4.2% and 6.3%, respectively, though they have since recovered slightly.

Cryptocurrencies were also hit hard, with Bitcoin and Ethereum briefly falling 15% and 20% to their highest levels since February.

While some investors, such as BitMEX co-founder Arthur Hayes, blamed the sell-off on the Bank of Japan's monetary policy, recent economic data also suggests the U.S. could soon be heading for a recession.

Siegel believes the problem is that the Federal Reserve has kept the federal funding rate too high for too long.

In its fight against inflation, the U.S. central bank has restricted liquidity in the financial system to the point where it’s hurting the economy, or so the perception goes.

Siegel isn’t the only one who thinks the Fed needs to quickly ease liquidity conditions.

“If the Fed determines that current policy is too tight, it could resort to an emergency inter-meeting rate cut,” said Brian Rudick, senior analyst at cryptocurrency trading firm GSR.

A rate cut would be positive for cryptocurrencies, as Bitcoin tends to do well when liquidity is plentiful.An emergency rate cut would also “demonstrate the Fed’s willingness to act,” Rudick said.

Traders are pricing in a 100% chance of a September rate cut by the central bank and an 83.5% chance of a 0.5% cut, according to CME FedWatch.

Don’t panic

But Sarah Hunt, founding partner and chief market strategist at asset manager Alpine Saxon Woods, said an emergency rate cut could do more harm than good.

“The concern is that an emergency rate cut by the Fed — or over-intervention — is now going to make people more worried and not necessarily help,” Hunt told Bloomberg.

She said the poor manufacturing data and the worrying jobs numbers were just two pieces of a larger puzzle.

Japanese monetary policy, tensions between Israel and Lebanon and the unwinding of leveraged trading are also shaking up markets — and those have nothing to do with the Fed.

“If the Fed had cut rates last week, you would have had a smaller problem, but the direction would still be down,” Hunt said.

Jake Ostrovskis, an over-the-counter trader at cryptocurrency market maker Wintermute, noted that an emergency rate cut could spook markets, whether warranted or not.

Such a rate cut would “indicate panic or excessive concern about the economy and could undermine confidence in the central bank,” Ostrovskis said.

That, in turn, would “create uncertainty and increase market volatility for all assets — especially long-dated assets like cryptocurrencies,” he said.

Noelle Acheson, former head of market insights at Genesis Global Trading, had a similar view.

She wrote on X: "An emergency rate cut would send a panic signal, which would not bode well for the US central bank. Imagine the panic if the Fed did an emergency rate cut and it didn't stop the rout."