The Fed cuts interest rates by 50 basis points, BTC breaks through $62,500: A new cycle is starting

Author: Climber, Golden Finance

On September 19, 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. Under the influence of the rate cut news, the crypto market soared, BTC broke through $62,500, and the growth performance was ahead of US stocks and spot gold.

What is most worth looking forward to is that experts from various institutions said that the 50 basis point rate cut in September is just the beginning, and it is still possible to continue to cut interest rates this year, and by the end of 2024, the cumulative rate cut may be 76 basis points.

The first rate cut in 4 years, the crypto market performed well

This rate cut has been waiting for four years, but the financial market has performed differently before and after the announcement of the rate cut. All three major U.S. stock indexes turned down, erasing the gains since the Fed announced its interest rate decision. In addition, spot gold has also completely given up the gains since the Fed’s interest rate decision was announced. On the other hand, the crypto market rose across the board, and BTC once rose to more than $62,500.

Brad Bechtel, global head of foreign exchange at Jefferies, also said that before the Fed made an interest rate decision, market expectations were almost 50-50. Therefore, the Fed obviously surprised half of the market. The Fed is trying to get ahead of the slowdown in the U.S. economy and provide support. But so far, the market’s reaction has not been too crazy, and a lot of the reaction has been reflected in the price.

Affected by the Fed's interest rate cut, the Hong Kong Monetary Authority also announced that it would cut its benchmark interest rate by 50 basis points to 5.25%, and the Louisiana government of the United States also agreed to accept Bitcoin payments.

For this rate cut, Fed Chairman Powell said that the Fed has not declared victory in inflation, but the economic situation has begun to be more optimistic, and this adjustment will help maintain the strength of the economy and the labor market.

In addition, when talking about the conditions for the rate cut, Powell said that there is no sign in the forecast that the Fed is acting hastily; if appropriate, the Fed can speed up or slow down, or even suspend the rate cut; if the economy remains stable, we can slow down the pace of rate cuts; similarly, if the labor market deteriorates, we can also respond; our forecast is not a plan or decision, we will adjust the policy as needed; taking into account the risks, we will cut the interest rate by 50 basis points today.

The Fed's rate cut decision also triggered heated discussions in the market, and the views of institutions were interpreted differently.

Fed's "Melophone" Nick Timiraos said the Fed voted to cut interest rates by 50BP, the first rate cut since 2020, marking a bold start to the rate cut. Eleven of the 12 Fed voting members supported the rate cut, bringing the benchmark federal funds rate to a range of 4.75% to 5%. Quarterly forecasts released on Wednesday showed that most officials expect to cut interest rates by at least 25BP at the November and December meetings. This rate cut decision puts the Fed firmly into a new phase: trying to prevent last year's rate hikes (which pushed borrowing costs to a two-decade high) from further weakening the U.S. labor market.

Nick Timiraos also said the Fed is actually making up for lost time. While some Fed officials have argued in recent weeks that the economy is not weak enough to require a 50 basis point rate cut, others have concluded that the cooling of the labor market this summer justifies further rate cuts because the Fed is actually making up for lost time.

Lindsay Rosner, head of multi-sector investments at Goldman Sachs Asset Management, said the Fed did what the market wanted. The market is satisfied with the Fed. The market is still ahead of the Fed and expects another 75 basis points of rate cuts this year (the Fed's dot plot shows 50 basis points). Since the unemployment rate and PCE estimates are very close (to the current level), the Fed can easily cut more (than shown in the dot plot).

Economist El-Erian believes that Powell does not want to admit that today's action is a supplement to the lack of a rate cut in July.

Golden Finance reported that Scott Helfstein, head of investment strategy at Global X, said that the Fed's 50 basis point rate cut may be too aggressive. We have witnessed the Fed's 50 basis point rate cut in advance, which may be seen as the Fed's concern about a weakening economy. However, strong fundamentals in the coming weeks may calm the market and may stop funds from leaving the market.

Carlos de Sousa, portfolio manager of emerging market debt at Vontobel, said that the global financing environment will continue to ease in the coming months, which will help emerging market central banks to continue their easing policies. This will create space for multiple emerging market central banks to restart or continue their easing cycles that have already begun before the Fed. Lower risk-free interest rates in developed countries will also reduce the external borrowing costs of emerging market issuers, thereby reducing refinancing risks and improving debt sustainability. The easing 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 another rate cut this year?

After the announcement of the Fed's decision to cut interest rates by 50 basis points, the most discussed issue in the market is when the next rate cut will be made.

The median of the Fed's dot plot shows that the Fed will cut interest rates by 100 basis points in 2024, and after a 50 basis point cut in September, there is an expectation of another 50 basis point cut. The Fed is expected to cut interest rates by another 100 basis points in 2025, the same as the rate cut expected in the dot plot in June.

The trend of US interest rate futures suggests that the cumulative rate cut will be 76 basis points by the end of 2024, and a cumulative rate cut of 196 basis points by October 2025.

U.S. Senator Elizabeth Warren criticized Powell (she has repeatedly criticized Powell for raising interest rates too quickly and being too lax with bank supervision): "This rate cut once again shows that Powell acted too late in lowering interest rates. The Fed has finally changed its policy direction and started to follow its dual mission of prices and employment. Lower interest rates mean relief for consumers and aspiring homeowners. Further rate cuts are needed."

CME "Fed Watch" said that the probability of the Fed cutting 25 basis points by November is 62.2%, and the probability of a 50 basis point cut is 37.8%. The probability of a cumulative 50 basis point cut by December is 36.6%, the probability of a cumulative 75 basis point cut is 47.8%; the probability of a cumulative 100 basis point cut is 15.6%.

"New Bond King" Gundlach said that the long-term bond market does not want the Fed to adopt an aggressive easing policy; the Fed is not behind the situation as before; after the US election, the Fed is more likely to cut interest rates by 50 basis points in November; current data supports Powell's remarks that the economy has not shown significant pressure.

Adam Button, chief foreign exchange analyst at the financial website Forexlive, said that Powell has been a dovish during his tenure, and he emphasized this today. It is obvious that Powell does not want to lag behind the curve in the interest rate cut cycle and decided to take the initiative. He made it clear at the Jackson Hole conference that he does not want to see the labor market deteriorate further, and it is expected that if the employment data shows further weakness, there is a possibility of another 50 basis point rate cut in November. Until recently, the market believed in the "dollar exceptionalism" that US economic growth will perform well and interest rates will remain higher than other regions.

It is now clear that the Fed will cut interest rates as fast as other G10 central banks, or even faster. So if the Fed continues to do this, there is still a lot of room for the dollar to fall. Overall, this rate cut is a bold move, and I think history will judge it as correct. The bond market suggests that the fight against inflation has been won, and there is room for interest rates to fall all the way to 3% before the Fed has to stop and think.

Golden Finance reported that Tom Hainlin, senior investment strategist at Bank of America, said that the Fed's rate cut is aimed at protecting employment, and two rate cuts are expected in the future. We have no particular view on whether the rate cut will be 25 basis points or 50 basis points. So I won't say we will definitely be surprised. Looking ahead, at least from now to the end of the year, two more rate cuts should be expected. As inflation begins to get closer and closer to the target, it is not surprising that Powell is focused on the mission of employment, and he is worried about potential downside risks in the labor market.

There are signs that the labor market may be a little weaker than the data shows. So this seems to us to be an insurance measure relative to the labor market to prevent unemployment from rising and keep the economy running well.

Conclusion

The Fed's interest rate cut has brought new hope to the financial market, especially the crypto market. Cryptocurrencies, led by Bitcoin, have generally performed well, which once again proves the vigorous vitality of emerging assets. What is most worth looking forward to is that many institutions are generally optimistic about continuing to cut interest rates this year, which also means that a new cycle of the crypto market is already on the way.