Author: Climber, Jinse Finance
On September 19, Beijing time, the Federal Reserve officially announced that it would cut the federal funds rate by 50 basis points to 4.75%-5.00%, which was the first rate cut since March 2020. Under the influence of the rate cut news, the crypto market surged, and BTC broke through $62,500, outperforming U.S. stocks and spot gold.
What is most worth looking forward to is that experts from multiple institutions have stated that the 50 basis point interest rate cut in September is just the beginning, and it is possible that interest rates will continue to be cut throughout the year, and the cumulative interest rate cut may reach 76 basis points by the end of 2024.
The first interest rate cut in 4 years, the crypto market performs well
The wait for this rate cut lasted four years, but the financial market showed mixed performance before and after the announcement. All three major U.S. stock indexes fell, erasing the gains since the Fed announced its interest rate decision. In addition, spot gold has also completely given up the gains since the Fed announced its interest rate decision. On the other hand, the crypto market rose across the board, with BTC once rising to over $62,500.
Brad Bechtel, global head of foreign exchange at Jefferies, also said that before the Fed made its interest rate decision, market expectations were almost 50-50. Therefore, the Fed obviously surprised half of the market. The Fed is trying to get ahead of the slowdown in the US economy and provide support. But so far, the market's reaction has not been too crazy, and a lot of the reaction has been reflected in the price.
Influenced by the Federal Reserve's interest rate cut, the Hong Kong Monetary Authority also announced that it would cut the benchmark interest rate by 50 basis points to 5.25%, and the Louisiana state government in the United States also agreed to accept Bitcoin payments.
Regarding this rate cut, Federal Reserve Chairman Powell said that the Fed has not declared victory in inflation, but the economic situation has begun to be more optimistic, and this adjustment will help maintain the strength of the economy and labor market.
In addition, when talking about the conditions for lowering interest rates, Powell said that there is no indication in the forecast that the Fed is acting hastily; if appropriate, the Fed can speed up, slow down, or even suspend interest rate cuts; if the economy remains sound, we can slow down the pace of interest rate cuts; similarly, if the labor market deteriorates, we can also respond; our forecasts are not plans or decisions, we will adjust policies as needed; taking into account all risks, we will cut interest rates by 50 basis points today.
The Federal Reserve’s decision to cut interest rates also sparked heated discussions in the market, with different interpretations from institutions.
Nick Timiraos, the "Fed Mouthpiece", said that the Fed voted to cut interest rates by 50BP, the first rate cut since 2020, marking a bold start to the rate cut. Eleven of the 12 Fed voting members supported the rate cut, bringing the benchmark federal funds rate down to a range of 4.75% to 5%. Quarterly forecasts released on Wednesday showed that most officials expect to cut interest rates by at least 25BP at meetings in November and December. The rate cut decision puts the Fed firmly into a new phase: trying to prevent last year's rate hikes (which pushed borrowing costs to a two-decade high) from further weakening the U.S. labor market.
Nick Timiraos also said the Fed is actually making up for lost time. While some Fed officials have argued in recent weeks that the economy is not weak enough to require a 50 basis point rate cut, others have concluded that the cooling of the labor market this summer justifies further rate cuts because the Fed is actually making up for lost time.
Lindsay Rosner, head of multi-sector investments at Goldman Sachs Asset Management, said the Fed did what the market wanted. The market is happy with the Fed. The market is still ahead of the Fed and expects another 75 basis points of rate cuts this year (the Fed's dot plot shows 50 basis points). Since the unemployment rate and PCE estimates are very close (to current levels), the Fed can easily cut more (than shown in the dot plot).
Economist El-Erian believes Powell does not want to admit that today's action is a supplement to the failure to cut interest rates in July.
Scott Helfstein, head of investment strategy at Global X, said that a 50 basis point rate cut by the Fed may be too aggressive. We have already witnessed a 50 basis point rate cut by the Fed in advance, which may be seen as the Fed's concern about a weakening economy. However, strong fundamentals in the coming weeks may calm the market and may prevent funds from leaving the market.
Carlos de Sousa, portfolio manager for emerging market debt at Vontobel, said that global financing conditions will continue to ease in the coming months, which will help emerging market central banks to continue their accommodative policies. This will create space for multiple emerging market central banks to restart or continue their easing cycles that have already begun before the Fed. Lower risk-free rates in developed countries will also reduce external borrowing costs for emerging market issuers, thereby reducing refinancing risks and improving debt sustainability. The easing cycle will prompt asset allocators to increase their exposure to emerging markets as the attractiveness of money market instruments and core developed country interest rates will gradually decline.
Will there be another rate cut this year?
After the Federal Reserve announced its decision to cut interest rates by 50 basis points, the most discussed issue in the market was when the next interest rate cut would take place.
The median of the Fed's dot plot shows that the Fed will cut interest rates by 100 basis points in total in 2024. After the 50 basis point cut in September, there is an expectation of another 50 basis point cut. The Fed is expected to cut interest rates by another 100 basis points in 2025, the same as the rate cut expected in the June dot plot.
U.S. interest rate futures suggest that a cumulative rate cut of 76 basis points will be achieved by the end of 2024, and a cumulative rate cut of 196 basis points will be achieved by October 2025.
U.S. Senator Elizabeth Warren criticized Powell (who has repeatedly criticized Powell for raising interest rates too quickly and being too lax with bank regulations): "This rate cut once again shows that Powell acted too late to lower interest rates. The Fed has finally changed its policy direction and started to follow its dual mandate of prices and employment. Lower interest rates mean relief for consumers and aspiring homeowners. Further rate cuts are needed."
CME's "Fed Watch" said that the probability of the Fed cutting interest rates by 25 basis points by November is 62.2%, and the probability of cutting interest rates by 50 basis points is 37.8%. The probability of a cumulative rate cut of 50 basis points by December is 36.6%, the probability of a cumulative rate cut of 75 basis points is 47.8%, and the probability of a cumulative rate cut of 100 basis points is 15.6%.
"New Bond King" Gundlach said that the long-term bond market does not want the Federal Reserve to adopt aggressive easing policies; the Federal Reserve is not lagging behind the situation as before; after the US election, the Federal Reserve is more likely to cut interest rates by 50 basis points in November; current data supports Powell's remarks that the economy does not show significant pressure.
Adam Button, chief foreign exchange analyst at financial website Forexlive, said that Powell has been dovish throughout his tenure and he emphasized this today. It is clear that Powell does not want to fall behind the curve in the rate cut cycle and decided to strike first. He made it clear at the Jackson Hole conference that he does not want to see further deterioration in the labor market and expects that if the employment data shows further weakness, there is a possibility of another 50 basis point rate cut in November. Until recently, the market believed in the "dollar exceptionalism", believing that US economic growth will perform well and interest rates will remain higher than other regions.
It is now clear that the Fed will cut rates as fast as, or even faster than, the other G10 central banks. So if the Fed continues to do this, the dollar has a lot of room to fall. Overall, this rate cut was a bold move, and I think history will judge it as the right one. The bond market is suggesting that the battle against inflation has been won, and that rates have room to go all the way down to 3% before the Fed has to stop and think.
Tom Hainlin, senior investment strategist at Bank of America, said that the Fed's rate cuts are aimed at protecting jobs, and two rate cuts are expected in the future. We have no particular view on whether the rate cut will be 25 basis points or 50 basis points. So we won't say that we will definitely be surprised. Looking ahead, at least from now to the end of the year, two more rate cuts should be expected. As inflation begins to get closer and closer to the target, it is not surprising that Powell focuses on the mission of employment, and he is worried about potential downside risks in the labor market.
There are some signs that the labor market may be a little bit weaker than the data suggests. So this looks to us like an insurance measure relative to the labor market to prevent unemployment from rising and to keep the economy running well.
Conclusion
The Fed’s interest rate cut has brought new hope to the financial market, especially the crypto market. Cryptocurrencies, led by Bitcoin, have generally performed well, which once again proves the vigorous vitality of emerging assets. What is most worth looking forward to is that many institutions are generally optimistic about continuing to cut interest rates this year, which also means that a new cycle of the crypto market is on the way.
