(Kitco News) – Risk asset investors got what they wanted on Wednesday afternoon when Federal Reserve Chair Jerome Powell announced a 50 bps cut to the benchmark interest rate, lowering it to a range of 4.75% - 5.0%.
On top of announcing the first rate cut in over four years, the latest FOMC projections suggested that the Fed would lower interest rates two more times in 2024, helping to juice the markets as traders went risk-on at the prospect of the return of easy money.
According to the Fed's latest Summary of Economic Projections (SEP), the majority of Fed officials expect the central bank to cut interest rates by 100 basis points in total this year.
“The Fed has given the market what it was looking for with the bigger 50-basis point rate cut,” said LMAX Group market strategist Joel Kruger in a note shared with Kitco Crypto. “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.”
After trending flat for most of the day, stocks spiked higher following the rate cut announcement as traders jumped back into the market once the initial spike in volatility died down. But the bounce higher was short-lived, and by the close of markets, the S&P, Dow, and Nasdaq all finished lower, down 0.29%, 0.25%, and 0.31%, respectively.
Gold initially caught a bid, with spot gold spiking above $2,600/oz for the first time in history during Powell’s press conference. It has since given back the gains and trades at $2,557.30/oz at the time of writing for a loss of 0.46% on the session.
Data provided by TradingView shows that Bitcoin also experienced a rapid price pump and pullback, spiking from support at $60,000 to an intraday high of $61,357 before returning to support near $60,000.
BTC/USD Chart by TradingView
At the time of writing, Bitcoin trades at $60,283, an increase of 0.31% on the 24-hour chart.
More volatility expected
While traders are in high spirits at the prospect of the return of easy money, that doesn’t mean it will be ‘up only’ for Bitcoin and other risk assets from here as history shows that rate cuts are often followed by major declines in the stock market.
From a technical standpoint, analysts at Secure Digital Markets noted that Tuesday’s “attempt to break above $61,000 failed, with prices pulling back after the New York close. The daily chart shows a clear bearish rejection off the 100-day moving average, along with a persistent pattern of lower highs over the past month.”
Arthur Hayes, the co-founder of BitMEX and CIO of Maelstrom, also warned about the outlook for asset prices following the first rate cut during his keynote speech at Token2049, saying that it could trigger a significant decline in risk assets.
“I think that the Fed is making a colossal mistake cutting rates at a time when the U.S. government is printing and spending as much money as they ever have in peacetime,” he said. “While I think a lot of people are looking forward to a rate cut, meaning that they think the stock market and other things are going to pump up the jam, I think the markets are going to collapse a few days after the Fed’s rates.”
Although liquidity easing cycles have historically favored BTC, Hayes warned that this move could aggravate inflationary pressures and strengthen the Japanese yen (JPY), leading to broad-based risk aversion.
“Cutting rates now is a mistake because inflation remains a persistent issue in the U.S., largely driven by government spending,” Hayes said. “Cheaper borrowing will only add fuel to the inflation fire.”
He also suggested that a potential rate cut will likely drive a market drop because it will “narrow the interest rate differential between the US dollar and the Japanese yen.”
“We saw what happened a few weeks ago when the yen went from 162 to about 142 over about 14 days of trading,” Hayes noted. “That caused almost a mini financial collapse. We’re going to see a revisit of that financial stress,” he said, suggesting that a 50 bps rate cut could lead to the unwinding of yen carry trades and force investors to unwind long positions in risk assets that were financed by JPY-denominated loans.”
Hayes also predicted that U.S. interest rates could fall back to near-zero levels as the U.S. government scrambles to support falling asset prices.
“As we see rates quickly decline, as I expect because the Fed is going to cut rates, markets are going to tank, and they’re going to say, well, let’s do more of that because that’s what’s going to fix things,” he said.
Eamonn Gashier, founder and CEO of Block Scholes, also warned about the effect the newly announced rate cut will have on the markets and the yen carry trade.
“The 50 bps cut signals that the Fed is more concerned about deteriorating conditions in the labor market than it is a second inflationary episode,” Gashier said in a note shared with Kitco Crypto. “This deeper cut will weaken the US dollar and potentially cause JPY/USD to rally slightly. While the expectation is for the Bank of Japan to pause rate hikes, the weakened dollar could have repercussions for another unwind in the Yen carry trade, with potential implications for risk-assets.”
“Given Bitcoin’s correlation with U.S. equities since the launch of the Bitcoin ETF, the S&P 500’s index performance in past cutting cycles is a useful indicator of what to expect next,” he noted. “Recessionary cycles initiated by a larger 50 bps cut have historically begun on the backdrop of broader worries about macroeconomic weakness, which results in prolonged downturns in risk-on assets. The larger cut this time however may be different and can be seen as the Fed taking extra measures to strengthen the labor market.”
Thus far, asset prices are trending higher, but it remains to be seen how things evolve over time as markets digest the 50 bps rate cut and prepare for additional cuts in the coming months.
Altcoins see mixed response
The response from the altcoin market was mixed, with the top 200 tokens evenly distributed between winners and losers.
Daily cryptocurrency market performance. Source: Coin360
ZetaChain was the top beneficiary of the return to risk-on sentiment, climbing 20.6%, followed by gains of 13.7% and 11% for Saga (SAGA) and Nervos Network (CKB), respectively. KuCoin Token (KCS) was the biggest loser, falling 6.1%, while OriginTrail (TRAC) lost 5%, and Echelon Prime (PRIME) declined by 4.3%.
The overall cryptocurrency market cap now stands at $2.09 trillion, and Bitcoin’s dominance rate is 57.4%.
