The Federal Reserve announced this morning that it would start cutting interest rates, lowering the benchmark rate by 0.5% to 4.75% to 5%. Bitcoin subsequently surged and broke through $62,000. Generally speaking, a rate cut will be beneficial to risky assets. So now that the Federal Reserve has once again started a rate cut cycle, will Bitcoin usher in a rising market after a large amount of liquidity is injected?
The Federal Reserve announced in the early hours of this morning (19th) Taiwan time that it would cut the benchmark interest rate by 0.5% (two points) to a range of 4.75% to 5%. This is the first rate cut since 2020. As soon as the news came out, the cryptocurrency market immediately rose, with Bitcoin breaking through $62,000, Ethereum breaking through $2,400, and altcoins also performing well.
Generally speaking, rate cuts help the performance of risky assets. As market liquidity increases, funds tend to flow into the stock and cryptocurrency markets. However, history shows that the market reaction to rate cuts is not always immediately positive. For example, when the Federal Reserve launched its first rate cut in many years in September 2019, Bitcoin fell 13.54% in the short term, from $10,000 to about $8,300. This may be because the rate cut at the time was mainly to respond to the economic recession.
The chart below shows the comparison between the S&P 500 index and the US benchmark interest rate since 1980. It can be seen that during the 2020 coronavirus pandemic, the 2008 financial crisis, and the 2000 Internet bubble, interest rates and stock market indices declined synchronously.
Such performance occurred because the Federal Reserve started to cut interest rates at that time. There were more serious economic problems, which forced the Federal Reserve to loosen its monetary policy, which was not good news for the investment market.
The reason for the Fed's rate cut
Next, let's understand why the Fed cut interest rates by 2 basis points this time? Chairman Powell emphasized that this is a preventive measure to maintain the stability of the economy and the labor market. It does not mean that a recession is approaching or that the job market may collapse. This has reduced market concerns about a recession and increased the possibility of a soft landing. (If a soft landing is successful, it will be good news for global venture capital)
In addition, judging from the market data, although the net inflow of Bitcoin spot ETFs has slowed down, it is still positive. The total market value of USDT has increased from US$104.7 billion in April this year to the current US$118.7 billion, and the market value of USDC has increased from US$34.4 billion at the end of August to US$35.5 billion. These data also show that off-market funds continue to enter the currency market.
In addition, the cryptocurrency market also has seasonal trends. It usually performs poorly in the summer, but performs well at the end and beginning of the year. Bitcoin has performed strongly in the past nine years, except for the bear market in October 2018, from 2015 to 2023. History may be expected to repeat itself before the end of this year.
Image source: Conlglass
Market reaction
After this rate cut, the market reacted differently. Democratic Senator Elizabeth Warren criticized Powell's rate cut, saying it was too late and needed further cuts. She had previously criticized Powell for putting the economy at risk and called for a substantial rate cut of 3 basis points.
Democratic presidential candidate and U.S. Vice President Kamala Harris said that the interest rate cut is good news for Americans who are under pressure from high prices. Republican presidential candidate and former U.S. President Trump criticized the large scale of the interest rate cut, saying that it shows that either the U.S. economy is very bad or the Federal Reserve is manipulating politics, or both.
Scott Helfstein, head of investment strategy at Global X, analyzed that a 2 basis point rate cut may be too aggressive and may be seen as the Fed's concern about a weakening economy. However, strong fundamentals in the coming weeks are expected to calm the market and may prevent funds from leaving the market.
Jeffrey Gundlach, CEO of DoubleLine Capital, who is known as the "new bond king," believes that the Fed's rate cut came too late and that layoff data showed that the U.S. economy has already fallen into recession. He expects another 3 basis point rate cut before the end of the year, with the baseline scenario assuming that the terminal interest rate will reach 3.50%.
Interest rate forecast and economic outlook
According to the Federal Reserve's latest interest rate dot plot, policymakers expect a total of 2 basis points in the last two meetings in November and December this year, which may be a 1 basis point cut in each of the two meetings, or a 2 basis point cut in one of the two meetings.
At the same time, the chart predicts that there will be four more interest rate cuts in 2025 and two in 2026, which means that the end point of the interest rate cut may fall in the range of 2.75% to 3%, although Powell added that future interest rate levels are unlikely to return to the ultra-low levels before the epidemic.
If the interest rate forecasts for the next few meetings remain within market expectations, the risk of concerns about a large-scale economic recession will be much smaller, and it is worth continuing to observe.
