The Fed’s Rate Cut: A Comparison of Key Moments
The Fed has officially cut interest rates for the first time since 2020. Western media are drawing parallels between this cut and the one in 2007.
So, how does this compare to the Fed’s previous rate cuts in 2001, 2007-2008, and now? Let’s dive into the analysis below!
Comparing Fed's Rate Cuts
2001: Dot-com Bubble and 9/11
In the early 2000s, the dot-com bubble burst, leading to a sharp stock market decline. To respond, the Fed cut interest rates from 6.5% to 1.75% in 2001.
This aggressive rate cut aimed to stimulate investment, boost consumer spending, and ease recession impacts. Despite these measures, unemployment rose from 3.9% to 6% by the end of 2002, reflecting ongoing economic challenges.
From 2000-2002, the market went through a major correction, with the S&P 500 falling nearly 78%, driving many companies towards bankruptcy after peaking in March 2000 at an all-time high of 1,548 points.
2007-2008: Global Financial Crisis
The next major turning point began on September 18, 2007, when the Fed started cutting rates. Exactly one year later, on September 15, 2008, Lehman Brothers—a 158-year-old investment bank—declared bankruptcy.
This triggered a series of events leading to the 2008-2009 financial crisis. Before the domino effect began, interest rates had already dropped to 2%. The collapse of the housing market and the subprime mortgage crisis forced the Fed to cut rates to near zero.
In addition to rate cuts, the Fed implemented large bailout packages and quantitative easing (QE) to inject liquidity into the financial system. Unemployment spiked from 4.6% in 2007 to 10% by the end of 2009, and the U.S. economy took years to fully recover.
2020: The COVID-19 Pandemic
In January 2020, the FOMC stated that the U.S. labor market remained strong, and economic activity was steadily growing. However, within weeks, the global outbreak of COVID-19 led to strict lockdown measures. The World Health Organization (WHO) declared COVID-19 a global pandemic on March 11, 2020. The Fed held two emergency meetings in March 2020, slashing the federal funds rate to nearly zero.
This period also saw a financial market crash, causing widespread panic among investors. Around 20.5 million jobs were lost in April 2020, and unemployment surged to 14.7%. While the U.S. economy began to recover in May 2020, the negative impacts of the pandemic and lockdowns lingered.
2024: The Fed’s Latest Move
On September 18, 2024, the Fed cut interest rates again, from 5.5% to 5.0% (a 50 basis point cut), after the release of CPI data, alongside slowing economic growth and a rise in unemployment to 4.4%. This is the first rate cut since March 2020, and the initial reaction from the crypto market has been FOMO-driven.
However, concerns that a 2008-style crisis might be repeating are starting to gain attention, given the similarities with the rate cut announcement in September 2007.
Analysts worry that financial markets could face shocks if the situation spirals out of control, as inflation may rise again, potentially leading to a recession in early 2025. Unlike in 2008, when the Fed faced severe liquidity shortages and applied QE to inject money into the system, in 2024, the Fed needs to carefully control liquidity while maintaining quantitative tightening (QT). The current economic data differs from the 2008 period.
During the 2007-2008 financial crisis, unemployment spiked from 4.6% to 10%, resulting in the collapse of many large banking and real estate companies. The Fed implemented QE and increased bank reserves to address the liquidity shortage.
In contrast, in 2024, while the labor market is stable, it is starting to slow, with unemployment rising from 3.9% to 4.4% after the Fed's rate cut. This time, the financial system has more ample liquidity, regulated through Reverse Repo transactions and a more gradual pace of QT.
Conclusion:
In theory, the risk of a crisis and recession seems lower for now.
Perspective:
Current economic data suggests that the financial system is under tighter “control” compared to 2007-2008.
While the Fed’s 50 basis point cut, despite not achieving the 2% inflation target, carries risks of inflation rebounding, this rate cut—being the first since March 2020—could help stimulate the real estate market and capital markets, such as stocks and bonds.
Impact on the Crypto Market:
The crypto market could benefit as the economy begins to absorb these changes.
In the crypto space, there are signs of entering an uptrend, as seen in the growth of money supply from 21 major central banks, correlating with Bitcoin's price.
Global money supply (M2) recently crossed above Bitcoin’s price, a pattern last seen in May 2020 when Bitcoin surged to an all-time high of $69,000.
Outlook:
From a cyclical perspective, Bitcoin is nearing a new growth phase, and the crypto market could enter a bull run.
In the short term, trading on daily fluctuations could be risky, but from a long-term perspective, the upcoming Bitcoin Halving cycle promises a brighter future for the market, starting from late 2024.
Note: This analysis is for informational purposes only and does not constitute investment advice.
