When the Federal Reserve announced a sharp rate cut, Wall Street traders immediately went wild🔥. Judging from the results, Powell won💪, because the market did not fluctuate violently. However, the Fed is betting on its "credibility" - the market may have a significant discount on the Fed's trust for a long time to come🤔. For the Fed, if it loses its reputation, it loses everything.
The answer is finally revealed: a 50 basis point rate cut. It turns out that most people guessed wrong. The Fed adopted an unexpected combination of dovish rate cuts + dovish dot plots + hawkish speeches. This time everyone got it wrong.
The whole meeting was full of surprises:
1. The wording of the policy statement has been adjusted
• A new commitment was added: In addition to the continued commitment to bring inflation back to 2%, the statement also added a firm commitment to “support full employment” 💼.
• Statement on inflation and employment: Job growth has slowed and inflation “made further progress” but remains high 📉.
Although the rate cut was 50 basis points, the Fed still showed great unity at this meeting, with only one official voting against it (Bowman advocated a 25 basis point rate cut). It is worth noting that this is the first time since September 2005 that a director has dissented. It is said that at least three officials supported a 25 basis point rate cut, and it seems that Powell succeeded in convincing them at the last minute.
2. Surprises brought by “dot plot”
The median of the "dot plot" shows that a total rate cut of 100 basis points is expected by the end of this year, which means there will be two more 25 basis point rate cuts. By 2025, the total rate cut is expected to reach 200 basis points.
Nine officials expect a 75 basis point or lower rate cut in 2024, and they predict only one 25 basis point cut before the end of the year. This prediction is not very common sense. Perhaps Powell convinced them to support a 50 basis point cut this time, but they still have reservations about the remaining rate cuts this year. The voting for the "dot plot" is secret, so this speculation cannot be verified.
Traders are even more aggressive than the Fed. They are betting that the Fed will cut interest rates by about 123 basis points by the end of the year and predicting another 50 basis point cut this year. They may continue to raise their expectations in the next few days, believing that there will be two more 50 basis point cuts this year.
3. Contrast after Powell’s press conference
This is the first time that the Federal Reserve has cut interest rates by 50 basis points, but it did not send a clear signal to the market.
• The Fed does not have a preset path and will make decisions based on the situation of each meeting📅. In other words, although the interest rate was cut by 50 basis points this time, it does not mean that the pace of interest rate cuts in the future will maintain this magnitude🚶♂️.
• There is no indication in the forecast that the Fed is acting hastily, and the rate cut is “precautionary” rather than an emergency move ⛑️.
• The Fed will receive two more employment reports before its next meeting, based on which it will make further decisions📊.
The Fed has not declared the battle against inflation over 🏁, especially as housing inflation has slowed less than expected, so don't expect further large rate cuts.
4. Unexpected market trends
As soon as the Fed's policy statement was released, gold, U.S. stocks and U.S. Treasury bonds all rose. Gold rose 1.2% to $2,600 per ounce, but as Powell's press conference unfolded, the gains were pared, hitting a low of $2,546, as he reminded the market not to treat this 50 basis point rate cut as normal.
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