Early this morning, the Federal Reserve officially announced that it would cut the federal funds rate by 50 basis points to 4.75%-5.00%, which was the first rate cut since March 2020. Under the influence of the rate cut news, the crypto market soared, and Bitcoin broke through $62,500, outperforming U.S. stocks and spot gold.
What is most worth looking forward to is that experts from multiple institutions have stated that the 50 basis point interest rate cut in September is just the beginning, and it is possible that interest rates will continue to be cut throughout the year, and the cumulative interest rate cut may reach 76 basis points by the end of 2024.
The first interest rate cut in 4 years, the crypto market performs well
The wait for this rate cut lasted four years, but the financial market showed mixed performance before and after the announcement. All three major U.S. stock indexes fell, 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 announced its interest rate decision. On the other hand, the crypto market rose across the board, with BTC once rising to over $62,500.
Brad Bechtel, global head of foreign exchange at Jefferies, also said that before the Fed made its 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 US 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.
Influenced by the Federal Reserve's interest rate cut, the Hong Kong Monetary Authority also announced that it would cut the benchmark interest rate by 50 basis points to 5.25%, and the Louisiana state government in the United States also agreed to accept Bitcoin payments.
Regarding this rate cut, Federal Reserve 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 labor market.
In addition, when talking about the conditions for lowering interest rates, Powell said that there is no indication in the forecast that the Fed is acting hastily; if appropriate, the Fed can speed up, slow down, or even suspend interest rate cuts; if the economy remains sound, we can slow down the pace of interest rate cuts; similarly, if the labor market deteriorates, we can also respond; our forecasts are not plans or decisions, we will adjust policies as needed; taking into account all risks, we will cut interest rates by 50 basis points today.
The Federal Reserve’s decision to cut interest rates also sparked heated discussions in the market, with different interpretations from institutions.
Nick Timiraos, the "Fed Mouthpiece", said that 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 down 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 meetings in November and December. The 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 happy 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 current levels), the Fed can easily cut more (than shown in the dot plot).
Economist El-Erian believes Powell does not want to admit that today's action is a supplement to the failure to cut interest rates in July.
Scott Helfstein, head of investment strategy at Global X, said that a 50 basis point rate cut by the Fed may be too aggressive. We have already witnessed a 50 basis point rate cut by the Fed 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 prevent funds from leaving the market.
Carlos de Sousa, portfolio manager for emerging market debt at Vontobel, said that global financing conditions will continue to ease in the coming months, which will help emerging market central banks to continue their accommodative 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 rates in developed countries will also reduce external borrowing costs for 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.
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 on the way.
