Author: Climber, Golden Finance

On September 19th Beijing time, the Fed officially announced a 50 basis point cut in the federal funds Intrerest Rate to 4.75%-5.00%, the first rate cut since March 2020. In response to the rate cut news, the crypto market surged, with BTC breaking through $62500, outperforming US stocks and Spot gold in terms of gains.

And the most anticipated is that, experts from longer institutions indicate that the 50 basis point rate cut in September is just the beginning, and it is still possible to continue cutting interest rates within the year, with a cumulative decrease of 76 basis points by the end of 2024.

First interest rate cut in 4 years, crypto market performs well

This interest rate cut has been awaited for four years, but the financial markets have shown mixed reactions before and after the announcement. All three major US stock indexes have turned down, erasing the gains since the announcement of the Interest Rate decision by the Federal Reserve. In addition, spot gold has completely retraced the gains since the announcement of the Interest Rate decision. On the other hand, the crypto market has experienced a significant rise, with BTC temporarily rising above $62,500.

Brad Bechter, global head of forex at Gate.io, also said that the market expected a nearly 50-50 chance before the Intrerest Rate decision by the Federal Reserve. Therefore, the Federal Reserve obviously surprised half of the market. The Federal Reserve is trying to act before the US economy slows down and provide support. However, so far, the market's reaction has not been too crazy, and many reactions have already been reflected in the prices.

And affected by the Fed's rate cut, the Hong Kong Monetary Authority also announced a 50 basis point cut in Benchmark Intrerest Rate to 5.25%, and the government of Louisiana also agreed to accept BTC payment.

Regarding this rate cut, Fed Chairman Powell stated that the Fed did not declare victory in terms of inflation, but the economic situation has begun to look more optimistic, and this adjustment will help maintain the strength of the economy and the labor market.

In addition, regarding the conditions for rate cuts, Powell stated that there is no sign in the forecast that the Fed is acting hastily; if appropriate, the Fed can speed up, slow down, or pause the rate cuts; if the economy remains robust, we can slow down the pace of rate cuts; similarly, if the labor market deteriorates, we can also respond; our forecast is not a plan or decision, and we will adjust the policy as needed; considering the risks, we will cut the Interest Rate by 50 basis points today.

The Fed's interest rate cut decision has also sparked market debate, with different interpretations from various institutions.

"Fed whisperer" Nick Timiraos said the Fed voted to cut the Intrerest Rate by 50BP, marking the first rate cut since 2020 and signaling a bold start to the easing cycle. 11 of the 12 Fed voters supported the move, bringing the Benchmark federal funds Intrerest Rate down to a range of 4.75% to 5%. The quarterly forecasts released on Wednesday showed that most officials expect at least a 25BP cut in the Intrerest Rate at the November and December meetings. The decision to cut rates this time firmly puts the Fed into a new phase: an attempt to prevent last year's rate hikes (which pushed borrowing costs to their highest level in two decades) from further weakening the U.S. labor market.

Nick Timiraos also said that the Fed is actually making up for lost time. While some Fed officials have argued in recent weeks that the economy isn't weak enough to warrant a 50 basis point rate cut, others have concluded that the cooling of the labor market this summer provides a reason to cut further because the Fed is actually making up for lost time.

Goldman Sachs Asset Management's Lindsay Rosner, head of multiple investment departments, said the Fed has delivered what the market wants. The market is pleased with the Fed. The market is still ahead of the Fed and is expected to cut rates by an additional 75 basis points this year (the Fed's dot plot shows 50 basis points). Due to the proximity of the unemployment rate and PCE estimates to the current level, the Fed can easily cut rates more than what is shown in the dot plot.

Economist El-Erian believes that Powell does not want to admit that today's action is a supplement to the no rate cut in July.

Scott Helfstein, Chief Investment Strategist at Global X, said that a 50 basis point rate cut by the Federal Reserve may be too aggressive. We have already witnessed a 50 basis point rate cut by the Federal Reserve, which could be seen as a sign of concern about the weakening economy. However, strong fundamentals in the coming weeks may calm the market and potentially prevent capital outflows.

Vontobel's emerging market debt portfolio manager Carlos de Sousa said that the global financing environment will continue to relax in the coming months, which will help the Central Bank of emerging markets to continue its loose policy. This will create space for multiple Central Banks in emerging markets to restart or continue their loose cycle that began before the Fed. The lower risk-free Intrerest Rate in developed countries will also drop the external borrowing costs of emerging market issuers, thereby reducing refinancing risks and enhancing debt sustainability. The loose cycle will prompt asset allocators to increase their risk exposure to emerging markets, as the attractiveness of money market instruments and core developed country Intrerest Rate will gradually decline.

Will there be another interest rate cut this year?

After the Fed's decision to cut interest rates by 50 basis points, the most discussed topic in the market is when the next rate cut will happen.

The median of the Federal Reserve's dot plot shows that the Fed is expected to cut interest rates by a total of 100 basis points in 2024. After a 50 basis point cut in September, there is an expectation of another 50 basis point cut. The Fed is also expected to cut interest rates by another 100 basis points in 2025, which is the same as the expected cut in the June dot plot.

The trend of US Interest Rate futures suggests that there will be a cumulative 76 basis point rate cut by the end of 2024, and a cumulative 196 basis point rate cut by October 2025.

US Senator Elizabeth Warren criticized Powell (who has criticized Powell for raising interest rates too quickly and being too lenient on bank regulation): "The rate cut once again shows that Powell has been slow to drop interest rates. The Fed has finally changed its policy direction, starting to follow its dual mandate of price and employment. The drop in interest rates means relief for consumers and aspiring homeowners. Further rate cuts are needed."

CME 'Fed Watch' stated that the probability of the Fed reducing 25 basis points in November is 62.2%, and the probability of reducing 50 basis points is 37.8%. The probability of cumulative reduction of 50 basis points by December is 36.6%, and the probability of cumulative reduction of 75 basis points is 47.8%; the probability of cumulative reduction of 100 basis points is 15.6%.

"New Bond King" Gundlach said that the long-term bond market does not want the Fed to adopt an aggressive easing policy; the Fed is not lagging behind the situation as it used to; after the US election, there is a greater possibility that the Fed will cut interest rates by 50 basis points in November; current data supports Powell's remarks that the economy has not shown significant pressure.

Adam Button, chief forex analyst at financial website Forexlive, said that Powell has been dovish throughout his tenure and emphasized this today. It is clear that Powell does not want to lag behind the curve in the rate-cutting cycle and has decided to take preemptive action. He explicitly stated at the Jackson Hole conference that he does not want to see further deterioration in the labor market, and it is expected that there is a possibility of another 50 basis point rate cut in November if employment data continues to weaken. Until recently, the market still believed in the "dollar exception theory", believing that the US economy will rise and interest rates will remain higher than in other regions.

It is now evident that the Fed's rate cut will be as fast as other G10 Central Banks, if not faster. Therefore, if the Fed continues to do so, there is still a lot of room for the US dollar to fall. Overall, this rate cut is a bold move, and I believe history will judge it to be correct. The bond market suggests that the battle against inflation has been won, with room for the interest rate to fall to 3% before the Fed has to stop and think.

Golden Finance reported that Tom Hainlin, Senior Investment Strategist at Bank of America, stated that the Fed's interest rate cut aims to protect employment, and two more rate cuts can be expected in the future. We don't have a particular opinion on whether the rate cut will be 25 basis points or 50 basis points. So we won't be surprised. Looking ahead, at least from now until the end of the year, it should be expected that there will be two more rate cuts. As inflation begins to approach the target, it is not surprising that Powell follows the mission of employment and is concerned about potential downside risks in the labor market.

There are indications that the labor market may be slightly weaker than the data suggests. Therefore, this seems to be a kind of insurance measure for us relative to the labor market, to prevent the unemployment rate from rising, and to maintain the good operation of the economy.

Conclusion

The Fed's rate cut has brought new hope to the financial market, especially the encryption market. Cryptocurrencies, led by Bitcoin (BTC), have performed well, once again demonstrating the vitality of emerging assets. What is particularly noteworthy is that longer-term institutions generally expect further rate cuts this year, which means that a new cycle in the encryption market is already underway.