Compiled by: Deng Tong, Gold Finance; Sources: Gold Finance, Bloomberg, CoinDesk, Bankless, Blockworks
At 12:00 AM Beijing time on November 8, the Federal Reserve announced a 25 basis point rate cut, lowering the federal funds rate target range to 4.5% to 4.75%. This is the second rate cut by the Federal Reserve this year, in line with market expectations. As early as September 18, the Federal Reserve announced a 50 basis point cut to the federal funds rate target range, bringing it down to between 4.75% and 5%, officially starting this round of rate cuts.
Why did the Federal Reserve cut rates? What impact will the rate cut have on the crypto market? Will there be further rate cuts in the future? Gold Finance has compiled relevant information as follows.
1. Why did the Federal Reserve cut rates?
In September, the Federal Reserve significantly cut rates by 50 basis points, initiating what is called a liquidity easing cycle, which is a positive development for risk assets, including cryptocurrencies.
Before the rate cut results were announced, federal funds futures indicated a 25 basis point cut was expected on Thursday, with similar actions anticipated in December, a pause in January, and multiple cuts before 2025. Additionally, many voices expect the Federal Reserve to cut rates: Wells Fargo believes the Federal Reserve will cut rates by 25 basis points, with a risk leaning towards maintaining rates; Morgan Stanley expects the Federal Reserve to cut rates by 25 basis points each in November and December, while upgrading its evaluation of economic growth and continuing to acknowledge progress on inflation.
1. Employment data
The target range for the federal funds rate (benchmark borrowing cost) is between 4.75% and 5%, well above the 'neutral' level (expected to be 3%-3.5%). Therefore, before any rate cuts, the market generally believes that the Federal Reserve has enough room to normalize the overly tight monetary policy through rate cuts, especially since the labor market has significantly cooled since October. So far this year, the U.S. has added an average of about 170,000 jobs per month.
The FOMC statement from the Federal Reserve indicates that the risks facing the target remain 'broadly balanced,' and the labor market conditions have 'overall softened'; it maintains the scale of balance sheet reduction and lowers the discount rate from 5.00% to 4.75%; it lowers the overnight reverse repo rate from 4.80% to 4.55%, and lowers the overnight repo rate from 5.00% to 4.75%.
2. Inflation
From 2020 to 2023, stimulus funds had a significant impact on prices. The following chart shows the changes in the U.S. Bureau of Economic Analysis Personal Consumption Expenditures (PCE) index over the past five years. The Federal Reserve prefers to use this indicator to measure the Consumer Price Index (CPI) because it not only measures the dollars consumers pay but also measures the dollars they pay for things like medical benefits. By looking at this indicator, policymakers can better understand consumption trends. Currently, the PCE has returned to pre-pandemic levels.
3. Economic output
Last week, the U.S. Bureau of Economic Analysis reported that GDP grew by 2.8% in the third quarter. This is a rather substantial number. However, when combined with the 1.4% and 3% growth rates of the first and second quarters, we arrive at an average annual growth rate of about 2.4%, slightly above the normal growth rate of 2.3% since the financial crisis.
According to the latest PCE data, the real interest rate (effective federal funds rate minus PCE) is 2.8%. This means the central bank can still lower rates by 280 basis points before borrowing costs no longer drag down inflation growth.
4. Loose fiscal policy
Trump has solidified the Senate majority, and the potential control of the House of Representatives will enhance his ability to fulfill election promises—tax cuts and loose fiscal policy. Trump is a proponent of a weaker dollar, believing it will help boost demand for U.S.-made goods and stimulate the domestic economy. Lowering borrowing costs is a good remedy for achieving this goal, as lower rates mean the dollar will become more abundant, thus lowering its value.
Some professionals point out that 'Powell expressed multiple logics in different responses: First, the current monetary policy is still restrictive; the Federal Reserve initiated rate cuts in September, and this rate cut should be seen as 'another action'; second, the Federal Reserve does not want or need to see further cooling in the labor market; third, the Federal Reserve believes that inflation in certain areas, such as rent, mainly reflects a 'catch-up' effect, meaning it reflects past inflationary pressures rather than the present, thus leaning towards the belief that inflation will continue to move towards 2%.' For details, click on the article 'Why Insist on Rate Cuts? - Interpretation of the Federal Reserve's November 2024 Monetary Policy Meeting'
2. How does the Federal Reserve's rate cut affect the crypto market?
Affected by the Federal Reserve's rate cut, U.S. stocks, bonds, and commodities all saw increases, and Asian stock markets also rose on Friday.
Stock markets in Australia, Japan, South Korea, and China all rose, supporting regional stock indices for the second consecutive day. Previously, the S&P 500 index rose 0.7%, and the Nasdaq 100 index rose 1.5%, both setting new highs. In the Asian markets, U.S. Treasury prices fell slightly, while U.S. stock index futures showed little change.
In the short term, the impact of rate cuts on the crypto market is quite limited: the crypto market has already priced in expectations for continued rate cuts by the Federal Reserve; Trump's victory in the U.S. election has greatly boosted cryptocurrency trends, and in the short term, the crypto market seems to be facing the dilemma of exhausted good news, but in the long term, the outlook for the crypto market is bright.
Lower interest rates are expected to ease pressures on the private sector and support housing affordability; rate cuts reduce borrowing costs, decrease the cost of capital, and enhance liquidity across the financial markets, which has a strongly positive impact on cryptocurrencies as a liquidity-driven asset class.
This rate cut measure further opened the liquidity floodgates, encouraging capital to flow down the risk curve. This environment is particularly favorable for cryptocurrencies. Historically, Bitcoin and similar assets thrive during periods of liquidity expansion, attracting investors seeking high returns at low borrowing costs. As the Federal Reserve focuses on ensuring the resilience of the private sector, especially in the context of declining inflation, cryptocurrencies become the best asset class for more capital entering the domestic and global systems.
3. Expectations for future rate cuts by the Federal Reserve
According to CME's 'FedWatch,' the probability of the Federal Reserve maintaining the current rate in December is 32.6%, the probability of a cumulative 25 basis point cut is 66.8%, and the probability of a cumulative 50 basis point cut is 0.6%. The probability of maintaining the current rate in January next year is 17.9%, the probability of a cumulative 25 basis point cut is 51.5%, and the probability of a cumulative 50 basis point cut is 30.4%.
Powell's response to rate cut expectations:
When asked if the Federal Reserve is considering pausing rate cuts in December, Federal Reserve Chairman Powell stated during the press conference that as officials shift the monetary policy stance to neutral, they have not yet made a decision on what policy actions the central bank will take in December. He said, 'In the face of uncertain prospects, we are prepared to adjust our assessment of the appropriate pace and ultimate goals of monetary policy. If the labor market deteriorates, the central bank will be prepared to take action more quickly. Slowing the pace of reducing the restrictive interest rate stance may also be appropriate.' Federal Reserve Chairman Powell noted that the unemployment rate has declined over the past three months and remains low. Without storms and strikes, hiring numbers would be 'slightly higher.' He also stated that improving supply conditions support the economy, and consumer spending growth remains resilient.
As we approach the neutral interest rate, it may be necessary to slow the pace of rate cuts; the Federal Reserve has just begun to consider adjusting the pace of rate cuts. They are prepared to adjust their assessment of the speed and targets of interest rate changes. They indicated that the Federal Reserve is not in a hurry to reach the neutral rate, and that finding the correct way to the neutral rate is a cautious process. Rate hikes are not part of the Federal Reserve's plan; their fundamental expectation is to gradually adjust rates to a neutral level. Powell stated during the press conference that the central bank will not intentionally lower the inflation rate below 2% to compensate for the overshoot of the past few years. He said, 'We believe that intentionally lowering the target below 2% to compensate for the periods it has exceeded the target is inappropriate. The Federal Reserve is currently operating under a policy called average inflation targeting, but it is expected to change this framework in next year's policy review.'
In the short term, many industry insiders believe the Federal Reserve will continue to cut rates in December:
U.S. interest rate futures price in that the Federal Reserve will cut rates by another 67 basis points in 2025.
LSEG data: After the Federal Reserve's rate decision, U.S. interest rate futures prices reflect expectations of a further 25 basis point cut in December.
Diane Swonk of KPMG: The Federal Reserve may cut rates in December, but it looks like they want to maintain 'flexibility' in the future. One of the main challenges facing the Federal Reserve right now is 'communication,' as this is not a time when they can provide 'much forward guidance.'
Whitney Watson, Co-Head of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management: The Federal Reserve will cut rates by 25 basis points in December. Watson stated, 'However, stronger data and uncertainties in fiscal and trade policy mean that the risk of the Federal Reserve choosing to slow the pace of easing is increasing. The word 'skip' might enter our vocabulary in 2025.'
Some analysts are skeptical about future rate cut expectations:
Ben Vaske, Senior Investment Strategist at Orion Portfolio Solutions: The FOMC announced a rate cut of 25 basis points today, marking a decrease in their aggressiveness compared to the September rate cut. Notably, long-term rates have been on a sharply rising trajectory since the first rate cut, and they began to decline following today's announcement. Against the backdrop of a strong U.S. economy, the path forward for the Federal Reserve may be more complex than a steady rate decrease.
Lindsay James, Analyst at Quilter Investors: The pace of future rate cuts from the Federal Reserve seems far from the certainty that was widely expected before the resolution. 'The volatility in employment data casts a shadow over the outlook, as does Donald Trump's victory,' said the investment strategist, 'Expectations for future rate cuts from the Federal Reserve are being significantly reduced compared to what many initially hoped for.'
Jackson Garton, Co-Chief Investment Officer at Makena Capital Management: Powell remained silent on providing new forward guidance during his press conference, and he did not comment on changes to the economic outlook summary. Short-term U.S. Treasury yields showed little change during Powell's remarks. Garton still believes the Federal Reserve may choose to cut rates in December, but he is uncertain. He stated, 'I think the likelihood of continuing to cut rates by 25 basis points at the next meeting is greater than 50%, but I am not 100% certain.'
Due to the dual positive factors of Trump's victory and the Federal Reserve's rate cut, as of the time of writing, BTC is priced at $76,035.89, with a 24-hour increase of 0.8%; ETH is priced at $2,919.63, with a 24-hour increase of 3.7%; SOL is priced at $198.45, with a 24-hour increase of 4.5%.
