- The Federal Reserve cut interest rates by 0.5%.
- Market participants were divided over whether the larger-than-usual rate cut was good news.
It's finally happening: U.S. interest rates are falling.
Federal Reserve Chairman Jerome Powell announced Wednesday that the nation's central bank will cut interest rates by 0.5%, bringing it to a range of 4.75% to 5%.
Bitcoin gained half a percent to $60,500, while other major crypto assets such as Ethereum and Solana remained stable.
High interest rates make it more expensive for people to borrow money and encourage investors to buy risk-free Treasury bonds for yield.
However, when interest rates fall, borrowing becomes easier, the economy perks up and investors are pushed into riskier assets like stocks and cryptocurrencies.
The Federal Reserve began raising interest rates in March 2022 to combat rising inflation. At the time, the interest rate was 0%. By July 2023, the interest rate had been raised to between 5.25% and 5.50%, marking the fastest and largest rate hike cycle in U.S. history.
0.25% or 0.5%?
The lead-up to the rate cut announcement was somewhat unusual because this time traders were unsure what would happen: a run-of-the-mill 25 basis point cut or a larger 50 basis point reduction. A basis point is one-hundredth of a percentage point.
According to FedWatch data, the market expects a 61% chance of a 0.5% rate cut, while the probability of a 0.25% rate cut is 39%.
Even investment banks are divided on the issue, with Goldman Sachs and Morgan Stanley predicting a 0.25% cut and JPMorgan predicting a 0.50% cut.
Logically, one would think that a larger rate cut would be positive for investors as it makes liquidity available more quickly. But calls for a 0.5% rate cut are accompanied by concerns that the U.S. economy could enter a recession.
“A 50 basis point rate cut could send the wrong message to markets and the economy. It could convey a sense of urgency, and that could become a self-fulfilling prophecy,” Jorge Lagarias, chief economist at consultancy Forvis Mazars, told CNBC.
But Quinn Thompson, founder of crypto hedge fund Lekker Capital, told DL News that recession fears are overblown and that investors who fear a market sell-off are relying too much on precedent.
“People are just looking at the two or three historical examples of the first 50 basis point cut by the Fed and saying, ‘Oh, every time they cut 50 basis points first, the market crashes,’ ” Thompson said.
“That’s like saying that because you went to Costa Rica three times and it rained every time, it’s 100 percent certain that it will rain every day in Costa Rica,” he added.
