The Federal Reserve's (Fed) September interest rate decision, which attracted a lot of attention, was a 0.5%p cut . In addition to the large-scale interest rate cut, the US consumer index released on the 17th also turned out better than expected, causing Bitcoin to rise significantly by about $5,000 last week.
The Fed's rate cut this time is the first decision since the COVID-19 incident in 2020. The economic structure that COVID-19 completely changed, after a large increase in prices and a long period of tightening, is facing a rate cut, so it should be considered very important. It means that the flow of the economy is changing again.
The first thing to look at is the rate of cut. Many economic experts wondered why the rate was cut by 0.5%p. The Fed cited the fact that the US employment data released in August had been significantly revised. On August 21, the US Department of Labor announced that the annual employment increase from April 2023 to March 2024 was 818,000 less than the previously released figure. The Fed explained that the job market was reported to be better than it actually was, and that the decline in the employment sector has already progressed considerably, so a large rate cut is appropriate to prevent a sudden shock.
There is a balance in the world. In a recession, there is no choice but to respond with a large interest rate cut, and a large interest rate cut raises prices instead of stimulating the economy. That is why the market has been paying close attention to the two related effects of the possibility of a recession and rising prices ahead of the Fed's interest rate cut.
The Fed emphasized that the possibility of these two things causing problems in the economy is quite low after this FOMC meeting. Fed Chairman Jerome Powell emphasized that “I don’t think inflation is a concern anymore,” and at the same time, “We are not in a recession at all, and we have to deal with shrinking employment.” What’s interesting is that when you listen to him, you naturally wonder why he is lowering interest rates by 0.5%p when there is no recession. The shrinking employment is actually close to what scholars call a “full employment” state.
He said that while lowering interest rates, he would maintain the current level of quantitative easing. He also said that he expected the neutral interest rate to be higher than in the past. The neutral interest rate is an appropriate level of interest rate that neither triggers inflation nor causes an economic slowdown.
The market is headed upwards… What about Bitcoin’s price?
The market reacted confusedly after the interest rate announcement. First, the interest rate was lowered by 0.5 percentage points, but it was difficult to discern which part of Chairman Powell’s explanation was the actual truth.
The asset prices that had been restless began to return to the level before the announcement, with Chairman Powell’s remark that the neutral interest rate would be higher than in the past as a decisive trigger. Despite the 0.5%p rate cut, stock prices fell slightly, bond yields also fell and then returned to the same level, and the dollar index (DXY) also fell and then rose to the same level.
On the 19th, a day after the FOMC, the market showed a large increase and showed signs of finding direction. Most assets, including the Standard & Poor's 500 (S&P500), Nasdaq, Bitcoin, and Ethereum, showed large increases.
Personally, I think that the background to this rise is the psychology of enjoying the current reduction for now. The two most influential factors in global liquidity at present are the US government and the Federal Reserve, and the Fed will likely maintain its current stance until the next FOMC meeting in early November. The US government is also likely to induce a rise in asset market prices ahead of the presidential election in early November.
Here, the Bank of Japan (BOJ) decided to freeze interest rates on the 20th, which has also eased concerns about the return of annuity funds, which were considered a strong potential threat to the US interest rate cut. In general, there were no clear factors that could control the rise in US risk asset prices during the month of October.
In this case, the cryptocurrency group is showing the most unexpectedly rapid increase. Some are already predicting that Bitcoin could reach $100,000 within the year based on the increasing global liquidity . MicroStrategy, considered a 'Bitcoin rich company', also announced that it sold $1.5 billion worth of company stocks to buy Bitcoin in a few weeks . It is still uncertain whether we will reach $100,000 within the year, but I think there is a very good upward momentum in the prices of some cryptocurrencies, including Bitcoin, for the month of October.
The Ether (ETH)-Bitcoin (BTC) chart, which began to rebound on the 20th, also shows this atmosphere well. The Ether-Bitcoin chart shows the real-time ETH price divided by the BTC price. If the BTC increase is high compared to ETH, the value decreases, and if the opposite happens, the value increases.
This figure has been falling sharply since early June, but has started to rise since the 19th. The Ethereum Foundation has sold $10 million worth of ETH this year. This means that ETH is an asset that is not likely to see a price increase this year. It remains to be seen whether this interest rate cut will be the catalyst to reverse this market trend.
Fed officials… Can they convince a skeptical market?
The market still seems to need a lot of explanation about this rate cut. In that regard, it is worth paying attention to the Fed officials' consecutive official statements this week. On Monday, the 23rd, FOMC member Raphael Bostic, President of the Atlanta Fed, is scheduled to speak at 9 p.m., and Chicago Fed President Goolsby is scheduled to speak at 11:15 a.m. the same day. President Bostic is known as a typical 'hawk' of the Fed, and President Goolsby is known as a typical 'dove', and in this FOMC, they reached a consensus to lower the interest rate by 0.5%p.
Another hawk, Minneapolis Fed President Neel Kashkari, will make two formal remarks on Tuesday the 24th and Friday the 27th. Then, Fed Chairman Powell is scheduled to speak on Thursday the 26th at 10:20 p.m.
Indicators that can gauge employment and economic recession are also released one after another. On Thursday, the 26th, at 9:30 p.m., the US GDP and the number of new unemployment claims will be released. Among them, the number of unemployment claims is an important indicator that can indirectly gauge the current employment situation.
Lastly, the US core consumer price index (PCE) indicator, which the Fed is confident about, is scheduled to be released at 9:30 p.m. on Friday the 27th. I hope that our readers will have a successful investment this week as well.
