On Thursday (September 19), Bitcoin surged above $62,000. The Federal Reserve decided to cut interest rates by 50 basis points in September, which was basically in line with market expectations. The dot plot suggested further interest rate cuts, but Fed Chairman Powell stressed that interest rates would not be cut sharply. Arthur Hayes, a legendary trader and founder of BitMEX, warned that a "nuclear disaster" was coming to the financial market, and safe-haven funds were flowing into the yen for arbitrage, and risky assets would face a major collapse.

In addition to the Fed's first rate cut in more than four years, the latest FOMC forecasts showed the Fed would cut rates two more times in 2024, helping to stimulate markets as traders took risks and bought assets on the prospect of a return to loose monetary policy.

According to the Fed’s latest Summary of Economic Projections (SEP), most Fed officials expect the central bank to cut rates by a total of 100 basis points this year.

Joel Kruger, market strategist at LMAX Group, said in a report: "The Fed met the market's demand with a larger rate cut of 50 basis points. Now that the market has priced in such a degree of easing, our next concern will be whether the market can continue to be optimistic about the future Fed's easing policy to purchase risky assets."

After mostly flat trading, stocks surged after the rate cut was announced as traders returned to the market after the initial peak in volatility subsided. But the rebound was short-lived. By the close, the S&P, Dow Jones and Nasdaq were all down, down 0.29%, 0.25% and 0.31%, respectively.

Gold was initially in demand, with spot gold breaking through $2,600 an ounce for the first time during Powell's press conference. Since then, gold has given up its gains and fallen back to $2,557.

After the resolution, Bitcoin rose rapidly to break through $62,000, and then fell back slightly.

While traders are excited about the prospect of a return to easy monetary policy, that doesn’t mean Bitcoin and other risk assets will only rise from now on, as history shows that rate cuts tend to lead to sharp declines in the stock market.

In his Token2049 keynote speech, Arthur Hayes also warned about the outlook for asset prices after the first rate cut, saying it could trigger a sharp drop in risky assets.

“I think it was a huge mistake for the Fed to cut rates because the U.S. government is printing and spending the most money it has ever spent in peacetime,” he said. “While I think a lot of people were expecting a rate cut, which means they thought there would be more chaos in the stock market and other things, I think the market would collapse a few days after the Fed cut rates.”

While liquidity easing cycles have historically favored Bitcoin, Hayes warned that the move could fuel inflationary pressures and push up the yen, leading to broad risk aversion.

He warned that financial markets were about to suffer a "nuclear disaster." He said: "It would be a mistake to cut interest rates now because inflation remains a long-term problem in the United States, driven primarily by government spending. Cheaper borrowing will only add fuel to the inflation fire."

He believes that a potential rate cut could cause the market to fall because it would "narrow the interest rate differential between the dollar and the yen."

“We saw a situation a few weeks ago where the yen fell from 162 to around 142 in 14 trading days. That almost led to a mini financial collapse. We are going to see this kind of financial stress reappear,” he noted.

He mentioned that a 50 basis point rate cut could lead to the unwinding of yen carry trades and force investors to unwind long positions in risky assets financed with yen-denominated loans.

He also predicted that U.S. interest rates could fall back to near zero as the U.S. government tries to support falling asset prices.

“As I would expect, because the Fed is going to cut rates and we’re seeing rates come down rapidly, the market is going to get antsy and they’re going to say, well, let’s do more because that’s going to solve the problem,” he said.

Block Scholes founder and CEO Eamonn Gashier also warned about the impact of the newly announced rate cut on the market and the yen carry trade. "The 50 basis point rate cut suggests that the Fed is more concerned about deteriorating labor market conditions than a second inflation event," Gashier said in a report.

“This further rate cut will weaken the dollar and could lead to a small rise in JPY/USD. Although the Bank of Japan is expected to pause its rate hikes, a weaker dollar could lead to another unwinding of the yen carry trade and could have an impact on risk assets,” he mentioned.

He noted: “Given Bitcoin’s correlation with the U.S. stock market since the launch of the Bitcoin ETF, the performance of the S&P 500 during past rate-cutting cycles could serve as a useful indicator of what to expect next.”

“Historically, recession cycles triggered by a 50 basis point rate cut have all started against the backdrop of widespread concerns about macroeconomic weakness, which has led to a prolonged downturn in risk assets. However, the magnitude of this rate cut may be different and can be seen as the Fed taking additional steps to strengthen the labor market.”

Asset prices have trended higher so far, but it remains to be seen how the situation will evolve as markets digest a 50 basis point rate cut and prepare for further rate cuts in the coming months.