The U.S. Federal Reserve made a historic move on Wednesday, cutting its benchmark fed funds rate by 50 basis points to 4.75%-5%. This decision marks the first rate cut in four years and comes after the central bank’s most aggressive hiking cycle.
Fed Members Expect Median Benchmark Rates to Come Down to 4.4% by Year-End
According to the Fed’s quarterly economic projection, members expect median benchmark rates to come down to 4.4% by year-end. This reflects some 50 bps more cuts in the next two Federal Open Market Committee (FOMC) meetings, up from only one cut projected in June.
Markets’ Appetite for Risk Assets Will Be Key to Watch
Analysts say that markets’ appetite for risk assets will be key to watch as investors react to the Fed’s decision. The price of bitcoin (BTC) shot up 1.2% to $61,000 immediately after the FOMC decision, but later fell below $60,000 and mostly flat over the past 24 hours.
Fed Members’ Expectations
The Fed members expect median benchmark rates to come down to 4.4% by year-end, reflecting some 50 bps more cuts in the next two Federal Open Market Committee (FOMC) meetings. This is a significant shift from only one cut projected in June.
Chairman Powell’s Remarks
During the press conference following the meeting, Chairman Jerome Powell said that "the U.S. economy is in a good place and our decision today is designed to keep it there." He added that the unemployment rate standing at "anywhere in the low-4% is a good labor market," and he doesn’t see any evidence that the likelihood of a recession or downturn is elevated.
Powell on Inflation
Chairman Powell reiterated that the Fed is still not declaring victory over inflation. He said that further 50 bps should not be considered as "the new pace" for further rate cuts, reiterating the Fed’s data-dependent approach.
Crypto Market Reaction
The price of bitcoin (BTC) shot up 1.2% to $61,000 immediately after the FOMC decision, but later fell below $60,000 and mostly flat over the past 24 hours. U.S. equities erased all their early gains on the Fed decision, with the tech-heavy Nasdaq 100 and the S&P 500 closing the session lower by 0.3%.
Gold Price Action
Gold first surged to hit a new all-time high over $2,600, then retraced to end the day in the red.
U.S. Dollar Index (DXY)
The U.S. dollar index (DXY) tumbled to 100.3, its weakest level since July 2023, then shot back up to 101. It’s a key metric to watch for gauging risk asset prices, according to CoinDesk analyst James Van Straten.
Cryptocurrency-Related Stocks
Cryptocurrency-related stocks also gave up their gains. MicroStrategy (MSTR) shares gained 1.5% through the day, while crypto exchange Coinbase (COIN) and investment firm Galaxy (GLXY) were flat to negative, similarly to most bitcoin miners including Marathon Digital (MARA) and Riot Platform (RIOT).
Market Analysts’ Reactions
"The Fed has given the market what it was looking for with the bigger 50-basis point rate cut," said Joel Kruger, market strategist at LMAX Group. "Our concern from here will be the market’s ability to continue to feel good about buying risk assets on future accommodative Fed gestures now that the accommodation has been priced to this extent."
Crypto correlations with broader risk assets surged to their highest levels in roughly 18 months, David Lawant, head of research at FalconX, noted in an email. This highlights how macro has been an increasingly important factor, especially during regime shifts like the one we’re witnessing now.
Market Expectations
Markets universally expected looser monetary policy from September as Chairman Jerome Powell said at last month’s Jackson Hole symposium that "the time has come for policy to adjust" and emphasized that interest rates are likely to remain low for a while. The market had priced in some 25 bps cut, but the Fed delivered a more significant reduction of 50 basis points.
Potential Risks
Analysts warn that the rate cut may have unintended consequences, such as triggering investors to unwind their yen-based carry trades en masse. This could lead to a significant increase in volatility and potentially even a crash for stocks and digital assets.
The same dynamic triggered the August 5 crash for stocks and digital assets, which briefly pushed BTC below $50,000.
Conclusion
The Fed’s decision to cut rates by 50 basis points is a significant move that will have far-reaching consequences for the global economy. Markets’ appetite for risk assets will be key to watch as investors react to the Fed’s decision. However, analysts warn of potential risks and caution that the rate cut may not be enough to stimulate economic growth.
References
- Federal Reserve Press Release
- Bloomberg News
- CNBC News
