The Fed Finally Cut Rates. What's Next?

Last week, the US Federal Reserve lowered the rate as most analysts expected. Moreover, the rate was reduced by 0.5%, not 0.25%. This is the first time the Fed has cut rates since March 2020. This may be the U.S. regulator's response to the fear of a global recession and also a reaction to reaching 2.5% inflation figures.

This event as a whole can be considered a good thing for the crypto community—after all, in the long term, a rate cut usually makes capital more available for the stock market and risky assets, including cryptocurrencies.

Fed Rate Changes Summary Over 30 Years

On the other hand, the fact that the rate has been cut for the first time since 2020 indicates problems in the global and U.S. economies. Before drawing any conclusions it is worth drawing analogies to the previous sharp rate cuts by the Fed in the last 30 years. The figure below shows how the Fed did it.

By May 2000, the Fed Funds rate was 6.5%, and in the previous 10 years, from 1991 to 2000, it had been between 3% and 6.75%. During 2001, the regulator had dramatically cut the rate from 6.5% to 1.75%. In the following years, 2002 and 2003, the Federal Reserve further reduced the rate to 1%. Other measures were also used to stimulate the economy - obviously, it was in a pretty severe crisis at the time and needed to keep up with demand.

From 2004 to 2006, the rate gradually rose to 5.25%. By the end of 2007, when the first wave of the Great Recession crisis hit, the rate dropped to 4.25%. In 2008, the Fed reduced it to 0.25% and kept it at this level until 2015. By the end of 2019, the rate had risen slightly but was only 1.75%. And was lowered again to the lowest level of 0.25% for 2 meetings in 2020.

In 2022, when the crisis was partially overcome, the Fed began to raise the rate to 5.5% in May 2023. Suddenly, the trend changed dramatically this year, and the Fed came back to rate cuts again.

We already have three clear cases over the last 30 years in which the Fed has started a rate cut cycle after hiking it in 2001, 2007, and 2020. Particularly sharp rate cuts come at a time when the economy is in big trouble.

How Did the Stock Market React to the Rate Cuts?

Thanks to the American Institute of Economic Research (AIER) and its Senior Fellow Richard M. Salsman, we have the graph, which shows a correlation between the Fed rate and the S&P 500 in the picture below.

It shows that, at the beginning of the rate cut cycle, the economy and stock market continued to decline and the market recovery from a maximum of 2000 took 7 years up to 2007. Also, during the Great Recession, the S&P 500 reached a dip in March 2009 and a full stock market recovery happened only in 2013. Two more pictures below demonstrate a correlation between the stock market and the Fed rate during those years in detail.

During the Coronavirus pandemic, the stock market also fell quite a lot. However, market recovery was faster than in 2001 and 2008 reinforced by unprecedented stimulus - going back to the previous high for the S&P 500 took less than 6 months from February 2020 up to August 2020.  However, during the coronavirus, the amount of liquidity injected into the economy by the Fed was at its maximum - and a second such high stimulus may not be tolerated by the economy and it may sink into stagflation.

What's Next?

Based on the figures and analysis above, we see that the cycle of the Fed interest rate reduction has started. This is confirmed by the positions of other global central banks. The European Central Bank, Bank of England, and Bank of Canada started a rate reduction this year.

However, in order for demand support and stock market growth, it’s essential more support and liquidity injection from monetary regulators. In other words, more rate cuts in the next few years and other possible stimulus for the economy.

Moreover, being a short-term positive factor for the stock market current rate cuts may play a different role in the mid-term distance (1 year) either causing panic or supporting the economy. Basically, we can present two scenarios for this purpose - negative and positive for the crypto market.

Positive Scenario

So far, Bitcoin and the crypto market have reacted to the Fed's decision with a slight increase. The price of BTC rose from $60,000 to $63,000.  In the last two weeks, we also had good news from Asian monetary regulators—the BoJ meeting and the People’s Bank of China (PBOC) Stimulus Program announcement. On 20 September, the BoJ decided to save 0.25% % interest rate after a small hike in July.

This Tuesday, PBOC announced upcoming rate cuts and allowed local banks to decrease reserve requirement ratios (RRR) by 50 bps, which can add to the economy about 1 trillion yuan ($142 bln). Also, the PBOC has lowered rates of existing mortgages to support demand in the real estate market.

The position of the Bank of Japan is very important - it lends investors on the global markets at the lowest rate. This August BOJ’s decision to hike the rate from 0.1% to 0.25% caused panic in the markets. Fortunately, the BoJ has calmed the markets this time. If US regulators continue to cut rates and other ways of injecting liquidity, for example, they will somehow reduce the reverse repo program (RRP), we are waiting for the markets to grow, but most likely, it will be after the US presidential election - in early 2025.

By the way, crypto opinion makers such as Anthony Scaramucci realize this, and they predict that Bitcoin will reach $100,000 only by the end of 2024 and early 2025. So, a bullish scenario for the market is quite possible in the long term, especially if regulators will increase liquidity injections. For instance, the Fed is likely to cut rates this November.

Negative Scenario

Based on previous rate cut cycles in the last 30 years, all of them were caused by tightening economic conditions, while regulators have taken measures to keep demand and add up liquidity to support the economy afloat. However, in 2001 and 2008, after short-term market growth pushed by rate cuts, it continued to fall for a long time, and market recovery up to the previous maximum took years.

And there is no proof that this time will be different. Probably at least 6-12 months is the essential term for the economy to change its trajectory after rate cuts. Nevertheless, critics continue to believe that the Fed is too late with the rate cut, and the U.S. economy will experience a surge in inflation.

At the same time, they warn that the threat of recession remains—a rate cut may fail to prevent the markets from falling and cause panic and a sell-off of risk assets. For example, this is the opinion of Bitmex ex-CEO Arthur Hayes.

Political Factor

In his speech, Jerome Powell noted that if the data on employment and inflation decline in the U.S. had been known in July, the Fed could have lowered the rate already. However, many believe that the political component also played a role in the regulator's decision—although the Fed is formally independent of the U.S. Government, it certainly coordinates its policy with the U.S. Treasury and other officials. It is very important for the Democratic government to show good figures before the US presidential election.

The current uncertainty in macroeconomics will probably continue this year. The stock and cryptocurrency markets are waiting for certainty in politics. It is likely to be particularly well affected by the victory of Donald Trump. Especially if the Republican candidate will implement his party's program to create a national Bitcoin reserve. In this case, the crypto market may start growing faster than the stock market, as it was a year ago after the launch of the Bitcoin ETF.

However, even in the case of Kamala Harris' victory, the measures already taken by the Fed may, combined with the end of the period of political turbulence, play its role in a matter of months like it was in 2020.

I would like to warn you that this publication is made for informational purposes. I’ve collected all the information available in open sources, but the situation in the world economy is complex, and it is not clear what scenario will develop - perhaps a repeat of the great recession and even stagflation of the 80s.

So, be careful when making any decisions. Especially if you trade with leverage. If you are interested in getting more crypto insights, you can watch the global crypto regulation rating here and get updates on my X account.