According to the latest news, the probability of a US interest rate cut in September has exceeded 70%, which is good news for the cryptocurrency market. At the same time, the US economy is weak and may fall into recession. Whether the Federal Reserve (Fed) will take decisive and substantial interest rate cuts next has attracted much attention.
The latest employment data released by the U.S. Bureau of Labor Statistics on July 5 showed that the number of non-farm payrolls in the United States increased by 206,000 in June, slightly higher than the market expectation of 190,000, but far lower than the previous value of 272,000, and the unemployment rate in June rose to 4.1%, lower than the forecast and previous value of 4%, the highest since November 2021. This shows that the hot employment in the United States is continuing to slow down, adding confidence to the United States' path to combat inflation.
Previous CPI, PCE and other data have shown that inflation has slowed down, and the release of non-farm data last night has once again boosted market expectations that the Federal Reserve (Fed) will start cutting interest rates in September. According to Fedwatch data, the probability of a September rate cut has risen from 57.9% at the end of last month to 71.8% at present, and the probability of maintaining interest rates unchanged in September has dropped to 24.8%.
If the Fed finally announces a rate cut at a meeting in September or later, it will undoubtedly be good news for the cryptocurrency market. Historical data shows that the Fed's rate cuts usually drive up the prices of cryptocurrencies such as Bitcoin. Because rate cuts will boost market sentiment for risky assets, cryptocurrencies as emerging assets will also be favored by funds, and the loose monetary environment will also create favorable conditions for the financing and development of cryptocurrency projects. In addition, rate cuts may also lead to a weakening of the US dollar, which will also boost cryptocurrency prices because cryptocurrencies tend to be negatively correlated with the US dollar.
However, there is still uncertainty about the number and extent of future interest rate cuts by the Federal Reserve. UBS analysts believe that the market may have underestimated the extent of this round of interest rate cuts. They expect the Federal Reserve may cut interest rates significantly, and even cut interest rates as many as four times in the next 12 months. Because the U.S. economy is facing serious downside risks, in addition to poor employment and inflation data, other indicators such as manufacturing PMI have also declined, which may prompt the Federal Reserve to adopt more active and loose monetary policies to stimulate the economy.
However, some analysts believe that although the US economy is indeed facing certain downward pressure, the Fed is unlikely to cut interest rates significantly and is more likely to adopt cautious policy fine-tuning because if interest rates are cut sharply, it may increase inflationary pressure and undermine the stability of the US financial system.
If the US only takes a cautious pace of interest rate cuts, the rebound space of the cryptocurrency market may be limited to a certain extent. However, if the Fed really cuts interest rates several times in the future, the cryptocurrency market may see a stronger rise. On the other hand, if the Fed takes more aggressive interest rate cuts, resulting in a further depreciation of the US dollar, this will undoubtedly increase the value of cryptocurrencies relative to the US dollar.
Currently, although market expectations for the Fed to cut interest rates have risen again, the risk of an economic recession in the United States is increasing due to continued high inflation, weak demand caused by interest rate hikes, and uncertainty in the geopolitical situation.
The U.S. unemployment rate rose from 3.96% in May to 4.05% in June, an increase of 0.22% since March. According to the Sahm rule, the three-month average is 0.42 percentage points higher than the lowest value in the previous 12 months, and is getting closer to the threshold of 0.5 percentage points. The Sahm rule is an indicator of economic development, which means that when the three-month average of the unemployment rate is 0.5 percentage points or more higher than the lowest point in the previous 12 months, the economy has fallen into recession.
In response to this situation, Federal Reserve Chairman Powell said in his latest speech that the United States is in the process of "de-inflation" and is more confident that inflation will continue to fall to 2% before starting to slow down or relax policies. He also rarely said that the US fiscal deficit problem should be solved as soon as possible.
Powell's statement sent out two signals: First, the Fed needs to see more evidence of slowing inflation before it will take action to cut interest rates; second, fiscal policy should also cooperate with monetary policy to jointly cope with downward economic pressure. This shows that interest rate cuts are already in the plan, but adjustments and decisions need to be made carefully in the early stage according to the US economic situation. In the later stage, when it is really necessary, measures beyond expectations may be taken to "turn the tide."
In summary, although the US economy is facing downward pressure, the Fed's future interest rate cuts are still uncertain. If the rate cut in September is followed by a cautious pace of rate cuts, the rebound of the cryptocurrency market may be suppressed. We need to pay close attention to the Fed's policy trends and the actual performance of the US economy to judge the medium- and long-term trend of the cryptocurrency market.
