The Federal Reserve cut interest rates by 0.5%. Market participants were divided on whether a larger-than-usual cut was good news.
It's finally happening: US interest rates are falling.
Federal Reserve Chair Jerome Powell announced on Wednesday that the nation's central bank will cut interest rates by 0.5%, bringing them to a range between 4.75% and 5%.
“The US economy is in good shape. It is growing at a solid pace. “Inflation is coming down,” Powell said.
Bitcoin rose half a percent to $60,500, while other major crypto assets such as Ethereum and Solana were flat.
Higher interest rates make it more expensive for people to borrow money and encourage investors to buy risk-free Treasury bonds to earn a yield.
However, when rates fall, borrowing becomes easier, which stimulates the economy and pushes investors to buy riskier assets like stocks and crypto.
The Fed has started a course of interest rate hikes in March 2022 to combat raging inflation. At that time, the rates were 0%. By July 2023, they have risen to between 5.25% to 5.50%, marking the fastest and largest rate hike cycle in US history.
0.25% or 0.5%?
The lead-up to the rate cut announcement is somewhat unusual because this time traders don't know what to expect: a modest 25 basis point cut or a bigger 50 bps cut. A basis point is equal to one-hundredth of a percentage point.
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The market pegged the odds of a 0.5% cut at 61%, FedWatch data showed, while a 0.25% cut was given a 39% chance.
Investment banks are also divided on the issue, with Goldman Sachs and Morgan Stanley forecasting a 0.25% cut and JP Morgan forecasting a 0.50% cut.
Logically, you would expect a big rate cut to be positive for investors, as it makes liquidity available faster. But calls for a 0.5% rate cut have emerged amid concerns that the US economy is heading into recession.
“50 [basis point] A cut could send the wrong message to markets and the economy. It can send an urgent message and, you know, it can be a self-fulfilling prophecy,” George Lagarias, chief economist at consulting firm Forvis Mazars, said. Said CNBC.
But recession fears are overblown, says Quinn Thompson, founder of crypto hedge fund Lecker Capital. DL News. And investors worried about a market selloff are putting more emphasis on the advance.
“People look at two or three historical examples where the Fed started with 50 bps cuts and say: 'Oh, every time they first cut 50 bps, the market goes to shit,'” Thompson said.
“It's like if you went to Costa Rica three times and it rained every time, it rains 100% of the days in Costa Rica,” he added.
Tom Carreras writes about markets for News. Got a tip about the Federal Reserve and Bitcoin? arrive at [email protected]
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