Soft landing or hard landing? Analyzing the economic stakes behind the Fed's rate cut decision

The Federal Reserve (Fed) announced on Wednesday that it would cut its benchmark interest rate by 50 basis points to a range of 4.75% - 5%, the first rate cut since 2020. The move marks the end of the Fed's nearly two-year tightening cycle and a shift to a more accommodative monetary policy. This decision not only affected traditional financial markets, but also had a profound impact on the cryptocurrency market.

Fed Chairman Jerome Powell said at a press conference that the rate cut is aimed at maintaining the good condition of the US economy. He emphasized that the unemployment rate remained below 4%, indicating that the labor market is in good condition. At the same time, the Fed has increased its confidence in the continued progress of the inflation rate toward the 2% target, believing that the risks of achieving employment and inflation targets are roughly balanced. However, the decision to cut interest rates also triggered market volatility. After the FOMC decision was announced, US stocks erased early gains, and the tech-heavy Nasdaq 100 and S&P 500 closed down 0.3% and then recovered.

Image source: WSJ

Crypto Market Reaction and Correlation

The price of Bitcoin (BTC) soared to $64,000 by Friday after the announcement of the rate cut, and then fell back to around $63,000. This volatility is in line with Wintermute's forecast of 2% - 3%. In addition, on the 18th, the US dollar index (DXY) fell to 100.3 after the rate cut decision, the lowest level since July 2023. A weaker dollar is generally seen as a favorable factor for risk assets, including cryptocurrencies. However, although the Fed has met the market's demand for a larger rate cut, there is still uncertainty as to whether the market can continue to have confidence in buying risky assets in the future.

Image source: CoinmarketCap

The Fed's quarterly economic forecast shows that the median benchmark interest rate may fall to 4.4% by the end of the year, suggesting that there may be two more rate cuts in the future. This is more radical than previously expected and reflects the Fed's judgment on economic conditions. For the crypto market, the Fed's policy shift brings both opportunities and challenges. On the one hand, loose monetary policy may increase demand for risky assets; on the other hand, market volatility may increase.

In general, the Fed's decision to cut interest rates has opened a new stage for the crypto market. During this phase, macro factors and the intrinsic value of crypto assets will jointly shape the direction of the market.

Possibility of a soft landing

The Fed's decision to cut interest rates is the first since 2020, ending a nearly two-year cycle of rate hikes. The move is intended to ease borrowing costs for everything from mortgages to credit cards while maintaining economic growth momentum. However, the decision was not unanimous, reflecting different views of the Federal Open Market Committee (FOMC) members on the economic outlook.

Economists generally believe that the Fed's rate cut is a cautious response to economic data. According to the latest data, the US inflation rate has fallen significantly from a 40-year high in the summer of 2022, but it is still above the Fed's long-term target of 2%. At the same time, the job market remains relatively strong and the unemployment rate remains low.

The Fed's goal is to achieve a "soft landing" for the economy - that is, to avoid a recession while controlling inflation. Historically, this outcome has rarely occurred, with the most famous example being the mid-1990s. Ellen Zentner, chief economist at Morgan Stanley, recently said that the U.S. economy currently has a good chance of a soft landing. She pointed out that the gradual cooling of the labor market, the continued decline in inflation, and the Fed's flexible policy stance all increase the likelihood of a soft landing.

However, challenges remain. Global economic uncertainty, geopolitical risks, and potential supply chain disruptions may all have an impact on the U.S. economy.

Market Reaction and Future Expectations

After the announcement of the rate cut, financial markets fluctuated. Some people in the market will think that the Fed's actions came too late, while others worry that cutting interest rates too quickly may reignite inflationary pressures. Market participants generally expect the Fed to cut interest rates further in the coming months, but there is still uncertainty about the specific timing and magnitude.

The Fed's rate cut path will depend largely on future economic data, especially inflation and employment data. If the economy continues to remain resilient, the Fed may adopt a more gradual rate cut strategy.

Political Pressure and Central Bank Independence

Against the backdrop of the Fed's 50 basis point rate cut, the cryptocurrency market is facing new opportunities and challenges. The views of Arthur Hayes, co-founder of BitMEX, provide us with a unique perspective. Hayes boldly declared that "the era of central banks is over", a view that coincides with the predictions of Scottish market strategist Russell Napier. They believe that governments are gradually taking over control of the money supply and the importance of central banks is declining rapidly. This shift may lead to targeted liquidity creation measures by governments in specific economic sectors, such as manufacturing and re-industrialization.

This trend may have a profound impact on the cryptocurrency market. As the traditional financial system faces more government intervention and potential capital controls, the appeal of cryptocurrencies as a globally transferable asset that is not directly controlled by the government may increase significantly.

In the year of the US presidential election, the Fed's decision-making is inevitably affected by politics. Fed Chairman Powell has repeatedly emphasized the independence of the central bank and stressed that the Fed's decisions are based on economic data rather than political considerations. However, political pressure still exists. Former President Trump has publicly criticized Powell's policies and said that he would consider replacing the Fed Chairman if he is re-elected. In my opinion, maintaining the independence of the central bank is essential to maintaining long-term economic stability. Political interference in monetary policy may lead to short-term interests overriding long-term economic health.

Changes in the interest rate environment and market impact

If the US interest rate will gradually drop from the current 5.25%-5.5% to a level close to 2 or even 1. This low interest rate environment may reignite the bull market for income-generating assets in the cryptocurrency market, especially products such as Ethereum (ETH) and BTC staking. For example, Ethereum: The annualized staking yield is 4%, which may be more attractive in a low-interest rate environment. At the same time, demand for interest-sensitive products such as tokenized treasuries may weaken as investors may turn to assets seeking higher returns.

Image source: Reuters

Market Volatility and Investment Strategies

Risk assets, including cryptocurrencies, may experience a significant adjustment in the months following the Fed's rate cut. This potential market turmoil reminds investors to remain vigilant and develop corresponding risk management strategies.

Faced with this complex market environment, investors should:

• Pay close attention to macroeconomic indicators, especially inflation rates and monetary policy changes.

• Pay attention to changes in the Japanese yen exchange rate and its impact on global financial markets.

• Consider a diversified portfolio, including traditional assets and crypto assets.

• Evaluate the relative advantages of different crypto products in a low interest rate environment.

Conclusion and Outlook

The Fed's half-point rate cut decision marks an important turning point in the US monetary policy. As we enter this new financial era, the cryptocurrency market may undergo significant changes. Increased direct government intervention in the economy may increase the attractiveness of cryptocurrencies as assets independent of the traditional financial system. At the same time, the low interest rate environment may push investors to seek new sources of income, which may be beneficial to certain crypto products.

The Fed is currently facing the complex challenge of finding a balance between achieving a soft landing for the economy and controlling inflation. Despite the volatility of the bond market, as long as real GDP remains stable, it means that the economy is expected to achieve a soft landing. The current low unemployment rate of 3.4% also provides a buffer for the economy. However, the inflation rate is still far above the Fed's target, which may increase the difficulty of a soft landing for the economy. Recent remarks by Fed Chairman Powell indicate that the state of the job market has become one of the key factors affecting monetary policy, and its importance is no less than inflation control. The Fed's interest rate cut strategy is not a passive response, but a forward-looking risk management measure aimed at balancing market risks through moderate interest rate cuts. This defensive interest rate cut reflects the Fed's cautious attitude in taking preventive measures when there are no obvious problems in the economy. It is necessary to control inflation and maintain economic growth to achieve the goal of a soft landing for the economy. However, the realization of this goal still faces many uncertainties, requiring the Fed to continue to monitor economic indicators and flexibly adjust policies to respond to various economic risks that may arise.

Looking ahead, the Fed will continue to pay close attention to economic data, especially inflation and employment indicators, to determine the future policy path. Market participants and policymakers will pay close attention to every move of the Fed, because these decisions will not only affect the US economy, but will also have a profound impact on global financial markets.