The US Federal Reserve cut its benchmark interest rate by 50 basis points to 4.75%-5% on Wednesday, the first rate cut in four years after its most aggressive rate-hike cycle.
“The Committee is more confident that inflation is progressing sustainably toward 2 percent and assesses that risks to achieving its employment and inflation goals are roughly balanced,” the press release said. “The economic outlook remains uncertain, and the Committee is mindful of risks to both sides of its dual mandate.”
Fed members expect the benchmark interest rate to fall to 4.4% on average by year-end, suggesting another 50 basis points of cuts at the next two meetings of the Federal Open Market Committee (FOMC), according to the Fed's quarterly economic projections. That's up from the single cut forecast in June.
Aside from the emergency rate cut during Covid, the last time the FOMC cut rates by half a point was in 2008 during the global financial crisis. The matrix of individual officials’ projections also shows another full percentage point in cuts by the end of 2025 and a half point in 2026. Overall, the dot plot shows the benchmark rate falling by about 2 percentage points after Wednesday’s move.
Cryptocurrency prices could face 2-3% volatility
Bitcoin (BTC) jumped 1.4% to $61,000 shortly after the FOMC decision before paring gains. The largest cryptocurrency has fallen 0.15% over the past 24 hours. U.S. stocks also edged higher, with the Nasdaq and S&P posting gains of between 0.6% and 0.8%.
Crypto-related stocks rose on Wednesday following the rate cut. MicroStrategy (MSTR) rose 3.77% on the day, while shares of cryptocurrency exchange Coinbase (COIN) and investment firm Galaxy (GLXY) rose 2.1%-3%.
Markets have been expecting easier monetary policy starting in September after Chairman Jerome Powell said last month that “it’s time for policy to adjust” due to cooling inflation and rising unemployment. Traders were split on whether the Fed would cut rates by 25 basis points or 50 basis points. Ahead of Wednesday’s decision, the CME’s FedWatch Tool showed a 40% chance of a smaller cut and a 60% chance of a larger cut.
This uncertainty led to a volatile trading session, with crypto market maker Wintermute predicting that bitcoin could swing 2%-3% in either direction following the decision.
BitMEX co-founder Arthur Hayes warned that the Fed’s rate cut could cause a market crash as the spread between borrowing rates between the US dollar and the Japanese yen narrows. This could cause investors to cancel their yen-based carry trades, causing the August 5 crash that briefly sent BTC below $50,000.
