On September 18, the Fed shocked the market when it unexpectedly cut its policy rate by 50 basis points (bps), bringing the target range down to 4.75% - 5.00%. This was the sharpest reduction since March 2020, far exceeding market expectations. Previously, the interest rate was anchored at a 23-year high, ranging from 5.25% - 5.50%.
The decision comes after positive signs on inflation. In August, US consumer inflation fell to its lowest level since February 2021, reaching 2.5% - lower than the forecast of 2.6%. However, core inflation (excluding food and energy) increased by 0.3%, showing that underlying pressures still exist. Job growth slowed, unemployment rate inched up but remained low.
The question is: How will this move impact the crypto market? Will the monetary easing inject liquidity, boosting crypto prices, or will the instability make investors wary?
The initial reaction in the stock market was mixed. Traders welcomed the 50-bps cut on September 18, with the Dow and S&P 500 rising. But optimism quickly faded, with stocks closing in the red, reflecting concerns that the Fed was acting to head off a recession.
As of September 19, the market has responded more positively. Stock indexes increased sharply, Nasdaq increased 2.7%, S&P 500 increased 1.66%. The cryptocurrency market also responded, with total capitalization increasing 6.5%, reaching 2.18 trillion USD.
Bitcoin (BTC) surpassed the $62,000 mark, Ethereum (ETH) increased by more than 6%. Top 100 altcoins all increased by 15% - 30%, recording one of the strongest increases in many weeks.
However, the financial community has expressed many concerns. The Kobeissi Letter, a reputable newsletter, pointed out that this is only the third time in history that the Fed has started a rate-cutting cycle with such a sharp cut - an alarming signal.
According to The Kobeissi Letter, the previous two (2001 and 2007) both resulted in recessions and market crashes. The Nasdaq fell 76% in the three years after the Fed cut rates by 50 bps in 2001. In 2007, the Nasdaq also lost 56% of its value.
Will 2024 be different? On the surface, the US economy is stable and inflation is subdued. But lurking beneath the surface may be risks that the market is not yet fully aware of.
Is the Fed anticipating slower economic growth or looking to cushion the blow of rising public debt?
In short, the Fed’s 50 bps rate cut was a surprise and controversial decision. Markets reacted positively in the short term, but experts worry that it could be a sign of an upcoming crisis, as has happened in the past.
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