Financial markets are booming, with heated discussions about the possibility of the US Federal Reserve cutting interest rates by another 50 basis points. A slight decline in the core PCE index has many investors starting to bet on this scenario.

The Fed's closely watched core PCE index rose 2.6% year-over-year in the latest report, slightly below the 2.7% forecast, and the odds are more than 50% for a 50 basis point cut.

The Dow Jones Industrial Average jumped 137.89 points to a new record high. Stimulus measures from the People's Bank of China (PBoC) also supported the stock market, providing a boost to risk assets.

Pressure from political developments

Japan's political situation is also a factor to watch. Shigeru Ishiba, a prominent critic of the Bank of Japan's ultra-loose monetary policy, is likely to become the next prime minister. Under his leadership, many analysts expect the central bank to abandon its low-interest-rate policy.

In the United States, the market is focusing on the next round of labor market data, including the JOLT report, ADP payrolls figures, and the unemployment rate. If these reports are positive, the Fed will have more grounds to cut 50 basis points in November, which could stimulate the growth of the cryptocurrency market.

Fed Chairman Jerome Powell has stressed his commitment to maintaining a strong labor market while keeping inflation in check, with a target of 2%. However, this is not easy, especially when inflation has reached record highs in recent years.

Despite Powell’s efforts, the recent rate cut has drawn criticism from Republican presidential candidate Donald Trump, who has blamed the Biden administration for rising inflation. President Biden, on the other hand, is seeking to restore public confidence, saying recent indicators show the economy is recovering.

The University of Michigan's consumer sentiment index hit its highest level since April, at 70.1 this month, indicating Americans are somewhat more optimistic about the economic outlook.

St. Louis Fed President Alberto Musalem has expressed a desire for the Fed to proceed more cautiously with rate cuts, predicting that it may cut just over a quarter point for the rest of the year, to avoid the risk of the economy overheating.

Cryptocurrency Market Situation

Against this backdrop, Bitcoin ETFs saw strong inflows, with a total value of $494.2 million over the weekend. Ether, despite a slow start, also saw growth, closing with $58.7 million in inflows.

Money flows into Bitcoin ETFs. Source: sosovalue

Implied volatility for ETH has increased by 8%, suggesting that the market is not yet fully stable. However, the ETH/BTC ratio remains firmly above 0.04.

The Federal Open Market Committee (FOMC) is due to meet in just 40 days to decide on a rate cut, a key moment that will come two days after the 2024 US Election Day. As things stand, CME data suggests a 50 basis point rate cut is more likely than a 25 basis point rate cut.

Forecasts from market tools

As of September 28, 2024, the CME Fedwatch tool shows that the odds of a 50 basis point cut are currently at 53.3%, while the probability of a 25 basis point cut is at 46.7%. While CME data is generally reliable, these odds could change in the near term, especially as economic data is released.

Source: CME Fedwatch tool

On Polymarket, a prediction platform with $6.54 million is betting on a 75-basis-point cut, although the odds are only 2%. A 25-basis-point cut is also predicted at 50%, while the odds of no change in interest rates are 3%.

Source: Polymarket

With the FOMC meeting approaching, the change in odds reflects the uncertainty surrounding the Fed’s decision. Upcoming economic data, along with the election results, will be important factors influencing the central bank’s decision in the coming period.



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