I don’t know when it started, but you have to understand the general economic data when you trade in cryptocurrencies! Especially in this round of bull market, what everyone is most looking forward to is the news of when the US Federal Reserve will announce a rate cut.
Earlier this month, the Bank of Canada took the lead by announcing a 1 basis point interest rate cut, becoming the first G7 country to start cutting interest rates; at the same time, the European Central Bank also announced a 1 basis point interest rate cut after the June meeting, which triggered global investors' optimistic expectations for welcoming loose policies.
However, the Federal Reserve, which everyone had been waiting for, announced in its latest meeting that it would maintain interest rates, which led to a plunge in the price of the entire cryptocurrency market. Why is a rate cut so important to the market? Why are people waiting for this good news? Is there a possibility of a rate cut this year? When is the most likely time for a rate cut?
What is an interest rate cut: lowering the benchmark interest rate to stimulate economic development!
Interest rate cuts refer to lowering the benchmark interest rate set by the central bank. The purpose is to allow more money to be active in the market by reducing the interest rate on savings and the cost of borrowing. Central banks of various countries often take interest rate cuts to stimulate overall economic activity when economic growth slows, unemployment rises, or inflationary pressures weaken.
Since the United States is the world's largest single economy and the U.S. dollar is the world's main reserve currency and trading currency, any change in interest rates will affect global capital flows and financial stability. Therefore, markets around the world are paying close attention to the U.S. interest rate policy.
What impact will the interest rate cut have: Funds will return to the market! The market will rise!
Why have the global investment markets, regardless of type, been watching the results of FOMC meetings one after another since the beginning of the year? Because interest rate cuts are equivalent to lowering borrowing costs, which is conducive to promoting consumption and investment.
After the interbank lending rate drops, commercial banks will lower the loan interest rates for enterprises and individuals. Overall, the loan amount is the same, but the amount to be repaid has become less, which will indirectly encourage more borrowing and spending. Consumers and enterprises will therefore have easier access to funds, thereby increasing consumer spending and corporate investment, and promoting economic growth.
In such a low interest rate environment, the cost of borrowing money becomes lower, which will also make investors tend to seek higher-yielding assets, such as stocks and real estate, or cryptocurrencies, which have more speculative opportunities, which will help drive up asset prices. Therefore, before and after each FOMC speech, there will be a time when the market will fluctuate sharply. As long as there are signs of an upcoming interest rate cut or the expected number of interest rate cuts may increase, it will be a big boon to the investment market! (On the contrary, as long as there is no possibility of an interest rate cut in the short term, it may cause a short-term market decline).
How will the United States cut interest rates?
With the expectation of interest rate cuts, investors will prepare for possible market growth. So, what conditions must be met before the United States will officially start cutting interest rates?
1. Slowing economic growth: Usually if economic growth shows signs of slowing down, such as an accelerated decline in GDP (gross domestic product), a slowdown in the growth rate of CPI (consumer price index) and corporate investment, policymakers will feel the need to stimulate economic growth by cutting interest rates.
2. Rising unemployment rate and declining non-farm data: The unemployment rate reflects the state of the job market, while the non-farm data is an important indicator of the health of the labor market. If the unemployment rate rises and the non-farm data falls, it means that the economy is weak and the labor market conditions are deteriorating. The job market performance may be improved by lowering interest rates.
3. Eased inflation pressure: The inflation rate is an important indicator to measure economic overheating or weakness, and curbing inflation is the main reason for the continuous increase in interest rates in the United States after the epidemic. The Federal Reserve usually sets the target inflation rate at around 2%. If the inflation rate continues to decline, close to or below zero, the Federal Reserve will tend to cut interest rates to stimulate the economy and push up prices to prevent deflation.
4. Global economic environment: The global economic growth slowdown and international events such as the Sino-US trade war have had a negative impact on the US economy. These international factors have increased economic uncertainty and forced the Federal Reserve to take interest rate cuts to protect the domestic economy.
In summary, judging from several key data of the FOMC, a decline in GDP, a decline in CPI, a decline in inflation rate, an increase in unemployment rate, and an increase in non-farm data will all increase the possibility of a rate cut.
By the end of the year, there are four FOMC meetings left this year, in July, September, November and December.
The likelihood and timing of a rate cut this year
According to the latest FOMC results, the market estimates that there may be only one rate cut in 2024, at most two and no more than two. It is worth noting that nearly half of the officials at the last meeting expected at least three rate cuts this year, but no one held the same view this time. In 2025, four rate cuts are expected, higher than the previous expectation of three.
Most predictions are that interest rates will be cut as early as September.
The impact of interest rate cuts on the cryptocurrency market
It is generally expected that interest rate cuts may accelerate the inflow of funds into the cryptocurrency market. Because interest rate cuts will lead to lower returns on traditional financial markets such as deposits in banks or government bonds, investors may seek higher-return investment channels, making cryptocurrencies an attractive option. Bitcoin and other cryptocurrencies, coupled with the promotion of ETFs, may see more capital inflows, pushing prices up.
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