In his speech, Federal Reserve Chairman Powell explained why the interest rate was cut by 50 basis points after the FOMC meeting.
The Federal Reserve decided to cut interest rates by 50 basis points (bps) after the FOMC meeting on September 18. This large rate cut by the Fed raised eyebrows because it was only the third time in recent history that the central bank started a rate cut cycle with 50 bps. However, Fed Chairman Jerome explained in his speech why they took this move.
Why the Fed cut interest rates by 50 basis points
Jerome Powell said the Fed sees the U.S. economy as "generally strong," which prompted their decision to cut rates by 50 basis points. The Fed has so far been hesitant to start a rate-cutting cycle as inflation remains below its 2% target.
However, Powell said they are increasingly confident that inflation will fall to 2% despite the move.The jobs report is another inflation data point that has raised concerns, but the Fed insists the labor market remains strong.
When asked about the increase in layoffs, Jerome Powell said they have not seen any increase in unemployment claims or layoffs. He added that they have also not heard from companies about upcoming layoffs, which suggests that unemployment claims are exaggerated.
While the Fed chairman said they will continue to take actions on a "meeting by meeting" basis, his speech indicated they are confident they can reduce inflation without the U.S. economy falling into recession.
Renowned economist Peter Schiff warned that the Fed's decision to cut interest rates could push the U.S. economy into a recession and could lead to higher inflation. However, the market did not seem to be worried about these warnings as it reacted positively to the Fed's dovish stance.
Meanwhile, the Fed revealed that it could cut interest rates two more times this year, by 25 basis points each. They also forecast a 100 basis point cut in 2025 and a 50 basis point cut in 2026.
Optimistic about the Fed's decision
Unlike Schiff, economist Alex Krueger is optimistic about the Fed's 50 basis point rate cut. He said the Fed's announcement of further rate cuts this year shows that they are in control and not in "reaction mode." The economist believes that the U.S. economy is "doing very well" and noted that this is crucial for risk assets such as Bitcoin.
He revealed that whenever the Fed begins an easing cycle and there is no recession, the stock market will rise by 10% within six months. On the other hand, whenever the central bank begins an easing cycle during an economic downturn, these stocks will fall by 12%. This means that these stocks and Bitcoin should perform well in the coming months because the US economy is not in a recession yet.
Indeed, after the Fed announced a 50 basis point rate cut, the stock and cryptocurrency markets reacted positively. Bitcoin broke out, while altcoins also surged following this macro decision. However, Kruger said Bitcoin’s trajectory still “heavily depends” on who wins the U.S. presidential election.
He also advised market participants to maximize their long positions in alternative assets early on election night if Trump leads in the vote count, adding that is what he plans to do.
