Fed Cuts Rates by 50bps, Bitcoin Soars Beyond $62,500: Is a New Economic Era Unfolding?

On September 19, the Federal Reserve officially announced a 50 basis point cut in the federal funds rate, lowering it to a range of 4.75%-5.00%. This marks the first rate cut since March 2020. Following the news, the crypto market saw a significant surge, with BTC surpassing $62,500, outperforming both U.S. stocks and spot gold.

What’s more anticipated is that, according to multiple institutional experts, this 50-basis-point cut in September is just the beginning. Further rate cuts are possible within the year, potentially totaling 76 basis points by the end of 2024.

First rate cut in four years, crypto market performs exceptionally. This rate cut has been awaited for four years, but financial markets reacted differently before and after the announcement. All three major U.S. stock indices turned negative, erasing gains made after the Fed’s rate decision. Similarly, spot gold has given back all its post-Fed decision gains. In contrast, the crypto market saw widespread gains, with BTC soaring past $62,500 at one point.

Brad Bechtel, Global Head of FX at Jefferies, commented that before the Fed’s decision, market expectations were split 50/50, and the Fed clearly surprised half of the market. The Fed is attempting to act before the U.S. economy slows further and to provide support. So far, however, market reactions haven’t been overly dramatic, as much of the impact has already been priced in.

In response to the Fed’s rate cut, the Hong Kong Monetary Authority also lowered its benchmark rate by 50 basis points to 5.25%, and the state government of Louisiana in the U.S. agreed to accept Bitcoin payments.

Federal Reserve Chair Jerome Powell noted that the Fed has not declared victory over inflation, but the economic outlook is increasingly optimistic, and this adjustment will help maintain the strength of the economy and labor market.

Regarding the conditions for future rate cuts, Powell stated that there are no signs in the forecast of the Fed acting hastily. If appropriate, the Fed can accelerate, slow down, or even pause rate cuts. If the economy remains strong, rate cuts could be slowed; similarly, if the labor market deteriorates, the Fed will respond. The forecast is not a plan or decision, and the Fed will adjust policy as needed. Considering all risks, today’s decision was to lower rates by 50 basis points.

The Fed’s decision has sparked significant market debate, with differing interpretations from institutions.

“Fed insider” Nick Timiraos reported that the Fed voted to lower rates by 50 basis points, marking the first rate cut since 2020 and a bold start to the easing cycle. Of the 12 voting members, 11 supported the decision, lowering the benchmark federal funds rate to a range of 4.75% to 5%. Projections released Wednesday show most officials expect at least two more 25-basis-point cuts in the November and December meetings. The decision firmly places the Fed in a new phase: attempting to prevent the aggressive rate hikes from further weakening the U.S. labor market.

Timiraos also noted that the Fed is making up for lost time. Although some Fed officials argued in recent weeks that the economy wasn’t weak enough to justify a 50-basis-point cut, others concluded that the cooling labor market over the summer justified further cuts.

Lindsay Rosner, Head of Multi-Sector Investment at Goldman Sachs Asset Management, said the Fed gave the market what it wanted. The market is satisfied with the Fed. It remains ahead of the Fed, expecting a total of 75 basis points in cuts this year (the Fed’s dot plot shows 50 basis points). Since the estimates for unemployment and PCE are very close to current levels, the Fed could easily cut more than what the dot plot suggests.

Economist Mohamed El-Erian believes Powell does not want to admit that today’s move compensates for not cutting rates in July.

Scott Helfstein, Head of Investment Strategy at Global X, said the Fed’s 50-basis-point cut may be too aggressive. The Fed’s preemptive 50-point cut might signal concerns over economic weakness. However, strong fundamentals in the coming weeks could calm markets and stem the outflow of funds.

Carlos de Sousa, Portfolio Manager for Emerging Market Debt at Vontobel, noted that the global financing environment will continue to ease in the coming months, allowing emerging market central banks to maintain their accommodative policies. This will create space for several emerging market central banks to continue or resume their easing cycles, which began before the Fed’s actions. Lower risk-free rates in developed countries will also reduce the external borrowing costs for emerging market issuers, improving debt sustainability. The easing cycle will encourage asset allocators to increase exposure to emerging markets as the attractiveness of money market instruments and core developed country rates diminishes.

Will there be more rate cuts this year? Following the Fed’s 50-basis-point rate cut, the market is now focused on when the next cut might occur.

The Fed’s dot plot median indicates a total of 100 basis points of cuts by 2024, with 50 basis points remaining after the September cut. The Fed is expected to cut another 100 basis points in 2025, matching the June dot plot forecast.

U.S. interest rate futures suggest a total of 76 basis points in cuts by the end of 2024, and 196 basis points by October 2025.

U.S. Senator Elizabeth Warren, who has repeatedly criticized Powell for hiking rates too quickly and being lax on bank regulation, said: “This rate cut shows again that Powell has been too slow to act in lowering rates. The Fed has finally shifted direction and is now following its dual mandate of price stability and employment. Lower rates mean relief for consumers and aspiring homeowners. More cuts are needed.”

CME’s “FedWatch” indicates a 62.2% probability of a 25-basis-point cut by November, with a 37.8% chance of a 50-basis-point cut. By December, the probability of a total 50-basis-point cut is 36.6%, with a 47.8% chance of 75 basis points, and a 15.6% chance of 100 basis points.

Jeffrey Gundlach, the “Bond King,” noted that the long-term bond market does not favor aggressive Fed easing. The Fed is not as behind the curve as it once was. There is a greater chance of a 50-basis-point cut after the U.S. election in November. Current data supports Powell’s statement that the economy is not showing significant stress.

ForexLive Chief Currency Analyst Adam Button stated that Powell has consistently been dovish throughout his tenure, and he emphasized that today. It’s clear Powell doesn’t want to fall behind in the rate-cutting cycle and has decided to act preemptively. Powell made it clear at the Jackson Hole symposium that he doesn’t want to see further deterioration in the labor market, and if job data weakens further, there’s a strong chance of another 50-basis-point cut in November. Until recently, the market believed in “U.S. dollar exceptionalism,” expecting U.S. economic growth to outperform and rates to stay higher than elsewhere.

Now, it’s clear that the Fed will cut rates as fast, if not faster, than other G10 central banks. Therefore, if the Fed continues on this path, the U.S. dollar has significant room to decline. Overall, this rate cut is a bold move, and I believe history will judge it as the right one. The bond market suggests that the battle against inflation has been won, and there is room for rates to fall to 3% before the Fed needs to pause.

Tom Hainlin, Senior Investment Strategist at U.S. Bank, said the Fed’s rate cut aims to protect employment, with two more cuts likely in the future. There’s no strong view on whether the next cuts will be 25 or 50 basis points, so we wouldn’t be surprised either way. Looking ahead, at least two more rate cuts should be expected before year-end. As inflation approaches its target, Powell’s focus on employment is unsurprising, given his concern about potential downside risks in the labor market.

There are signs that the labor market may be weaker than the data suggests. This seems like a form of insurance to prevent rising unemployment and ensure the economy runs smoothly.