- The US Federal Reserve cut interest rates by 0.5%.
- Market participants are divided on whether a larger-than-usual rate cut is good news.
Finally, interest rates in the US are falling.
US Federal Reserve Chairman Jerome Powell announced on Wednesday that the nation's central bank will cut interest rates by 0.5%, bringing them to a range of 4.75% to 5%.
Bitcoin rose 0.5% to hit $60,500, while other major crypto assets like Ethereum and Solana remained steady.
High interest rates make it more expensive for people to borrow money and encourage investors to buy risk-free Treasury bonds for the return.
However, as interest rates fall, borrowing becomes easier, the economy picks up, and investors are pushed into buying riskier assets like stocks and crypto.
The US Federal Reserve began raising interest rates in March 2022 to combat rising inflation. At that time, interest rates were 0%. By July 2023, interest rates had been raised from 5.25% to 5.50%, marking the fastest and largest rate hike cycle in US history.
0.25% or 0.5%?
The lead-up to this rate cut announcement was somewhat unusual as traders were unsure what to expect this time: a 25 basis point cut or a larger 50 basis point cut.
According to FedWatch data, the market expects a 61% chance of a 0.5% rate cut, while the chance 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% rate cut, while JPMorgan is predicting a 0.50% rate cut.
Logically, one would assume that a deeper rate cut would benefit investors because it would provide quicker liquidation . But the call for a 0.5% rate cut also comes with concerns that the US economy could enter a recession.
“A 50 basis point rate cut could send the wrong message to markets and the economy,” George Lagarias, chief economist at consultancy Forvis Mazars, told CNBC. “It could convey a sense of urgency and could become a self-fulfilling prophecy.”
But Quinn Thompson, founder of crypto hedge fund Lekker Capital, told DL News that recession fears are overblown. Investors worried about a market sell-off are relying too much on precedent.
“People just look at two or three historical examples of the Federal Reserve cutting rates by 50 basis points and say, ‘Oh, every time they cut the first 50 basis points, the market crashed,’” Thompson said.
“It's like saying that because you've been to Costa Rica three times and it rained each time, it's 100 percent certain that it's going to rain every day in Costa Rica,” he added.
