In the previous article (September 16), we briefly discussed the four macroeconomic factors that need to be paid attention to in the next year, including the issue of the Fed's interest rate cut. The interest rate decision of the United States today (September 18, September 19 at 2:30 am Beijing time) is an event that has attracted global attention this week. The market has been looking forward to the Fed's interest rate cut for more than two years, and there should be a conclusion this week.
According to the latest betting data from the prediction platform, the probability of a 50bps rate cut has prevailed, currently at 57%, while the probability of a 25bps rate cut has dropped to 43%. The bets in the prediction pool have now exceeded $49 million, as shown in the figure below.
Although the forecast data shows that a 50bps rate cut seems to have the upper hand, the possibility of a 25bps rate cut is still 43%. In fact, the difference between these two data is not very large from the perspective of odds, and there is still suspense. As we mentioned in the previous article: the market's differences seem to be still relatively large. Judging from the current situation, the market should have strengthened the expectation of 25bps. The most concerned (worried) thing at present may be whether the market has already priced in the expectation of 50bps.
But in any case, whether the interest rate is cut by 25bps or 50bps this month, it may have a relatively large impact on the short-term financial market (including the crypto market). That is to say, short-term fluctuations may still be relatively large. It is recommended to watch more and do less. As for the final result, we will not know until tomorrow morning. I wonder how many friends will choose to stay up late?
Personally, I don’t really care about this short-term market change, because in the long run, this short-term change is not important. If we take a longer-term view, the Fed is expected to lower interest rates to around 3.00% in the next 1-2 years (maybe 2-3 years), and at the same time, most currencies in the world should also fall.
1. Why does the Federal Reserve want to cut interest rates?
Normally, when the U.S. economy slows, the Fed lowers interest rates to reduce borrowing costs for businesses and consumers, encourage spending and investment, and boost the U.S. economy. That means people (including companies) get more loans, the Fed prints money, and then that money goes into circulation (and may also lead to a new round of inflation).
Here we can first briefly review the interest rate cuts in 2020:
Before the COVID-19 pandemic, the Fed’s interest rate was at a relatively historical low of 1.5%-1.75%. But with the outbreak of COVID-19 (new coronavirus pneumonia), the Fed made two emergency rate cuts within a month (March 2020):
- The first time is 50 bps (0.5%)
- The second time is 100 bps (1%)
This has brought interest rates down to 0% to 0.25%, essentially making borrowing extremely cheap because the sharp reduction in borrowing costs has triggered an influx of liquidity into the market.
Although inflation did not surge immediately at the time, the influx of liquidity also led to supply chain problems and increased consumer demand, and inflation eventually surged in 2021. In response, the Federal Reserve resumed a series of interest rate hikes starting in 2022, raising interest rates to the current range of 5.25%-5.50%.
In fact, to put it simply, interest rate cuts and interest rate hikes are just a cyclical game of "everything goes to the opposite extreme", but this game also determines the direction of the global economy and creates rounds of disasters and opportunities (while seeing the disasters, we must also actively think and seize some opportunities).
2. The impact of the Fed’s interest rate cut on the crypto market
The Fed’s interest rate cut affects global financial markets, which of course includes the riskier crypto market.
The interest rate cuts in 2020 were the main driving force behind the last round of rapid growth in the crypto industry, as cheap liquidity and lower borrowing costs prompted investors to turn to riskier, high-growth assets. Then, in 2021, the crypto market also ushered in a new round of bull market. As shown in the figure below.
Therefore, many analysts also believe that Bitcoin may usher in a real new round of big market in 2025.
However, judging from the current macroeconomic environment, because there is no direct stimulus from black swan events such as COVID-19, the Fed’s interest rate cut this time is expected to be gradual and slow, rather than fierce and drastic, so most people predict that the first interest rate cut will be 25 bps or 50 bps.
Regarding this interest rate cut, I found that some institutions also have different opinions, such as:
- JPMorgan Chase expects a 50 bps rate cut
- Morgan Stanley expects a 25 bps rate cut (potentially a total of 75 bps by end-2024)
- Bank of America expects a 25 bps rate cut
From a comprehensive comparison, we can also find that there are some differences between the interest rate cuts in 2020 and this year:
The first is the concern about inflation. The interest rate cut in 2020 was mainly due to the outbreak of the epidemic, while this year's interest rate cut is mainly due to inflation, which will make the Fed more cautious in its specific operations.
Secondly, in terms of starting interest rates, compared to the interest rate of less than 2% in 2020 (which was close to zero after two rate cuts), the current interest rate (5.25% - 5.50%) is much higher.
The third is the pace of interest rate cuts. It is expected that the interest rate cuts starting this year will most likely be gradual, which is different from the drastic interest rate cuts taken in 2020 in response to the epidemic.
Therefore, we believe that this rate cut will definitely be good for Bitcoin and the entire crypto market in the long run, but the impact may not be as great as the rate cut in 2020. The rate cut in 2020 occurred under special circumstances, and we are unlikely to see a repeat of the script that directly triggered a large-scale bull market with this year's rate cut. In addition to the factors of the rate cut itself, the crypto market has also had some problems that it needs to face after two years of development (such as a large number of new projects that will further dilute liquidity).
But no matter what, we still say what we said in the article a few days ago: the crypto market in 2025 is still worth looking forward to, and we will always remain optimistic about the long-term development of the crypto field. We just need to hold on to the cake in our hands and continue to be patient.
3. The impact of the Fed’s interest rate cut on the stock market
The stock market mentioned here mainly refers to the US stock market. I don’t know much about A-shares and don’t know what to say. Anyway, theoretically speaking, as we mentioned above, as long as the Federal Reserve cuts interest rates, the currencies of most countries in the world should also follow suit, including the RMB, and this will definitely give the RMB some room for operation, because the pressure on the exchange rate has been reduced. As for how much opportunity this operating space can give to A-shares, or to give people the opportunity to earn more RMB, it is hard to say.
When it comes to the US stock market, we may need to think about the question we mentioned in the previous article (September 16): Generally speaking, it is reasonable for the first interest rate cut to be considered bearish only when there is an expectation of a recession. But if it is a non-recession period, the first interest rate cut can also be bullish.
So, is the US economy currently in recession?
Take the S&P 500 as an example. According to historical data, if the US economy is in recession, the average return rate of the S&P 500 index is -12% (negative 12%) within one year after the first interest rate cut. If there is no recession, the average return rate of the S&P 500 index is +13% within one year after the first interest rate cut. As shown in the figure below.
But the key to this issue is that we won’t know whether a recession has occurred until a few months after the official rate cut.
At present, there seems to be some controversy in the market about whether the US economy is really in recession. When writing this article, I looked at the prediction platform again, and currently the bet on a recession in 2024 is only 7%. As shown in the figure below.
Typically, recessions require the Fed to implement larger rate cuts. If we use historical data to look at, since 1960, every time the market expects a 200 basis point rate cut, a recession has hit within a few months.
Some analysts believe that the probability of a recession in 2025 is much higher, and estimate the probability of a recession before 2026 to be about 56% (we will see as we go, maybe this prediction will be completely different in a few months).
At least at this stage, we have not seen any effective evidence that the United States is experiencing a recession.
Regarding the question of whether the US economy is in recession, let's take a look at the views of some institutions:
- James Reilly, senior market analyst at Capital Economics, said: Based on previous easing cycles, our expectations that the Federal Reserve will cut interest rates significantly and the US economy will not enter a recession are consistent with the statistical performance of strong returns for US stocks.
- Dirk Willer, global head of Citigroup, said: If the economy encounters a hard landing (forcing the Fed to cut interest rates further than expected), there will be a lot of money flowing into the bond market. If it is a soft landing, the situation is really a bit unclear.
- Yung-Yu Ma, chief investment officer at BMO Wealth Management, said: U.S. economic growth is still a little better than most countries.
- Rick Rieder, head of BlackRock's global asset allocation investment team, said: The U.S. economy is slowing down, but it is still in relatively good shape, and I don't think a recession is near yet.
In short, the Fed’s interest rate cut will have an important impact on the crypto market, the stock market, and other asset classes such as gold and silver.
So, now that we understand the problems with recession, the next core question seems to be: Can the Fed avoid a recession?
If so, then in the short term, we may see some new opportunities again in the fourth quarter of this year, but no matter how high the probability of such opportunities is and how long they can last, the most important thing is what we have always emphasized in previous articles, that is, to continue to do a good job in risk management and position management.
