Written by: Arain, ChainCatcher

The shoe finally dropped. In the early morning of September 19th, Beijing time, the Federal Reserve Committee announced that it would lower the target range of the federal funds rate by 50 basis points to between 4.75% and 5.00%. This is the first time the Federal Reserve has started to cut interest rates since March 2020. Previously, in order to ease domestic inflation in the United States, the Federal Reserve raised interest rates 11 times in a row from March 2022 to July 2023, with a cumulative increase of 525 basis points.

This means that the US monetary policy has shifted from tightening to easing. Bitcoin has temporarily stopped its sluggish trend and rebounded before the interest rate cut decision, returning to $60,000 per coin. Since then, it has risen sharply and hit a 20-day high. Before the US stock market opened today, cryptocurrency concept stocks rose, with Coinbase (COIN.US) up more than 3% and MicroStrategy (MSTR.US) up more than 4%.

The rate cut is rare and the market reaction is confusing

Historically, the Federal Reserve's large-scale interest rate cuts have often led to economic growth, stimulated inflation, and given rise to asset bubbles.

This time, the Federal Reserve announced a 50 percentage point interest rate cut, an adjustment rarely seen in history. Bank of America had previously warned that a 50 basis point interest rate cut "makes no sense, is difficult to communicate, and could trigger a risk aversion shock."

The United States has only cut interest rates three times in history without experiencing an economic recession, namely during the Greenspan era of 1994-1996, the Asian financial crisis of 1998-1999, and the cash shortage in 2019. The three interest rate cuts were 25bp each. Some market analysts believe that this rate cut may make up for the July rate cut and is a manifestation of the Fed's lagging action. However, Fed Chairman Powell denied that the Fed's rate cut was delayed for too long and did not believe that this action lagged behind the interest rate curve. This rate cut is precisely "a reflection of the Fed's commitment not to lag behind the economic situation."

Nomura Securities said it studied the performance of assets during several rounds of large-scale interest rate cuts in history, and said that three months after the Federal Reserve cut interest rates by 50 basis points, the S&P 500 index remained basically unchanged, but small-cap stocks rose sharply, technology stocks performed well, value stocks once again outperformed growth stocks, the US dollar rose, metal prices soared, and the yield curve showed a bull market steepening trend.

JPMorgan expects the Fed to continue cutting interest rates, while noting that the start of the Fed's easing cycle often "coincides with poor performance of risk assets."

On the day the rate cut was announced, U.S. stocks hit a new high, but ended up falling. The Dow Jones Industrial Average closed down 0.25%, the S&P 500 closed down 0.29%, and the Nasdaq Composite closed down 0.31%.

Judging from the current market reaction, the performance of the cryptocurrency market has benefited from the Fed's interest rate cut. Tradingview data shows that Bitcoin is currently in a buying state, and the moving average shows a strong buying state.

Leena ElDeeb, research analyst at 21Shares, said: "Retail sales exceeded expectations and were welcomed by the market, temporarily alleviating people's concerns about a recession. We may see a recovery in investor interest in risky assets such as cryptocurrencies, stimulating more funds to flow into Bitcoin spot ETFs."

CryptoQuant founder Ki Young JuX said institutions are no longer actively shorting Bitcoin. CME futures net positions have fallen by 75% in the past 5 months.

Bitcoin on-chain analyst @Willy Woo expressed his views on the latest X, saying that the bullish trend remains in the short term, but "maybe there is still a week left": "We have seen a lot of spot BTC being snapped up, and the exchange derivatives inventory ratio remains stable, but if there is a short squeeze, this situation may change quickly. The chart pattern is forming a bull flag. The current demand and supply are neutral and bearish, but if some liquidations occur, there are signs of entering a bullish structure. Cautious optimism."

Glassnode's latest report states that based on on-chain data, the Bitcoin market is currently in equilibrium, with investors mainly holding, but market volatility may increase in the future: "The supply side is tightening, and the number of readily available stablecoins has declined significantly. However, the increase in the supply of stablecoins brings greater future purchasing power, creating a tension between current inactivity and potential future demand. This creates a spiral spring effect in the market, suggesting that volatility will increase further in the future."

It should be pointed out that the interpretation of the interest rate cut information by institutions still needs to continue to pay attention to the subsequent net inflow of ETFs. According to SoSoValue data, on September 18, the US spot Bitcoin ETF reported a net outflow of US$52.83 million, ending a four-day net inflow of more than US$500 million. The outflow was led by Ark Invest and 21Shares' ARKB, with an outflow of US$42.41 million.

Pay attention to the subsequent rate cut rhythm and the US election

The Federal Reserve may continue to cut interest rates.

Nineteen members of the Federal Open Market Committee expect the Fed to cut interest rates further before the end of this year, including nine who expect a 50 basis point cut and seven who expect a 25 basis point cut.

Many institutions have expressed the view that the Fed will continue to cut interest rates. Brian Coulton, chief economist of Fitch Ratings, said that this round of easing cycle will last for 25 months and 10 interest rate cuts, a cumulative reduction of 250 basis points; JPMorgan Chase and Citigroup expect the FOMC to cut interest rates by 50 basis points at the November meeting, and JPMorgan Chase believes that each meeting thereafter will cut interest rates by 25 basis points; Bank of America Global Research expects the Fed to implement a 75 basis point interest rate cut in the fourth quarter of this year.

The extent of the Fed's interest rate cuts has become a hotly debated topic during this Fed rate cut cycle, as it is associated with the question of "whether the U.S. economy is in good shape."

Biden said on social media X: "We have just reached an important moment: inflation and interest rates are falling, and the economy remains strong... Our policies are reducing (consumer) costs and creating jobs."

U.S. Vice President Harris also said the rate cut was welcome news. She issued a statement saying, "While the announcement (of a rate cut) is good news for Americans who have been hit by high prices, my focus is on continuing to lower prices."

Former US President Trump questioned the Fed's interest rate cut. When asked about his reaction to the rate cut at a campaign event in New York on the 18th, Trump responded that it either reflects "a very bad economy": "I think if they are not just playing politics, cutting interest rates so much shows that the economy is very bad. Either the economy is very bad or they are playing politics, there are only two possibilities. But this is a big rate cut."

Powell said at a press conference that day that there is no indication that the possibility of a downturn in the US economy is high.

Emanuel Coh, executive director of Barclays Capital Securities, believes that it may take two or three quarters for economic growth to rebound after the first interest rate cut, so it is uncertain whether the US economy can avoid a recession.

It is worth noting that the phenomenon of "US recession" will also affect the subsequent price trend of Bitcoin. Grayscale expects that if the US economy avoids recession and maintains a controlled slowdown path, Bitcoin may retest its previous historical highs.