In this:👇
- Is history about to repeat?
- What are Fed rate cuts?
- Why do rate cuts move the market so much?

What are Fed rate cuts?

When the U.S. economy slows down, the Federal Reserve lowers interest rates, making borrowing cheaper for businesses and consumers.

This encourages spending and investment, boosting the economy.

Essentially, people and companies take out more loans, the Fed prints new money, which enters circulation and can lead to inflation.

2020 Rate cuts

Even before the pandemic, interest rates were at a historically low range of 1.5% - 1.75%.

When COVID-19 hit, the Fed made two emergency cuts in one month:

- First cut: 50 bps (0.5%)
- Second cut: 100 bps (1%)

This brought the federal funds rate to 0% – 0.25%, essentially making money extremely cheap for borrowing.

While not "free," borrowing costs were drastically reduced, sparking an influx of liquidity into the markets.

Impact on Crypto

Rate cuts in 2020 were a major driver of the crypto sector's rapid growth, as cheap liquidity and low borrowing costs pushed investors toward riskier, high-growth assets.

While inflation didn't spike immediately, the influx of liquidity eventually contributed to rising inflation in 2021.

2024 Rate cuts

Following the low interest rates in 2020, inflation surged in 2021 due to supply chain issues and increased consumer demand.

In response, the Fed began a series of rate hikes starting in 2022, bringing rates to the current range of 5.25% – 5.50% (two-decade high).

FOMC September 18th

Tomorrow, the Fed is expected to begin cutting rates.

This time, the cuts are anticipated to be gradual rather than drastic, with most predicting a 25 bps or 50 bps on the first reduction.

Forecasts for the First Rate Cut:

- JP Morgan: 50 bps cut expected

- Morgan Stanley: 25 bps, favoring slow, gradual cuts, with a potential total reduction of 75 bps by the end of 2024

- Bank of America: 25 bps, with caution about larger cuts but acknowledging the possibility of a 50 bps reduction if economic conditions worsen

Difference Between 2020 and 2024 Rate Cuts

- Inflation Concerns: In 2024, inflation remains a key issue, making the Fed more cautious

- Higher Starting Rates: Rates are much higher now (5.25% – 5.50%) compared to near-zero in 2020

- Cutting Pace: 2024 cuts are expected to be gradual, unlike the drastic cuts in 2020 to counter the sudden economic shock

Conclusion

Rate cuts will likely support Bitcoin and the whole crypto market, but their impact won’t be as significant as in 2020.

The 2020 cuts occurred under unique circumstances - near-zero rates, a pandemic, and massive liquidity injections.

While rate cuts are still bullish for crypto because they encourage economic growth, it’s unlikely we’ll see a repeat of the massive bull run triggered by the 2020 cuts.

That's all for now.

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