- The Federal Reserve cut interest rates by 0.5%.
- Market participants are divided on whether the larger-than-ordinary cut is good news.
It’s finally happening: US interest rates are coming down.
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 U.S. economy is in good shape. It is growing at a solid pace. Inflation is coming down,” Powell said.
Bitcoin rose half a percentage point to $60,500, while other major crypto assets like Ethereum and Solana stayed steady.
High interest rates make it more expensive for people to borrow money, and incentivises investors to buy risk-free Treasury bonds to earn yield.
When rates come down, however, taking loans becomes easier, which dynamises the economy, and investors are nudged to buy riskier assets like stocks and crypto.
The Fed began its course of interest rate increases in March 2022 to combat raging inflation. At the time, rates were 0%. By July 2023, they had been hiked 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 was somewhat uncommon because this time traders didn’t know what to expect: an ordinary 25 basis point cut, or a larger 50 bps cut. A basis point equals one-hundredth of a percentage point.
The market had priced the odds of a 0.5% cut at 61%, FedWatch data showed, while a 0.25% cut was given a 39% chance of occurring.
Even investment banks were divided on the issue, with Goldman Sachs and Morgan Stanley predicting a 0.25% cut, and JPMorgan, 0.50%.
Logically, you’d expect a bigger rate cut to be positive for investors, since it makes liquidity available faster. But calls for a 0.5% rate cut emerged alongside concerns that the US economy might be entering a recession.
“The 50 [basis point] cut might send a wrong message to markets and the economy. It might send a message of urgency and, you know, that could be a self-fulfilling prophecy,” George Lagarias, chief economist at consulting firm Forvis Mazars, told CNBC.
But recession fears have been overblown, Quinn Thompson, founder of crypto hedge fund Lekker Capital, told DL News. And investors worried about the market selling off are putting too much emphasis on precedent.
“People are simply looking at the two or three historical examples where the Fed started with 50 bps cuts and saying: ‘Oh, every time they cut 50 bps first, the market goes to shit,’” Thompson said.
“It’s like saying that, because you went to Costa Rica three times and it rained each time, then it rains 100% of the days in Costa Rica,” he added.
Tom Carreras writes about markets for DL News. Got a tip about the Federal Reserve and Bitcoin? Reach out at tcarreras@dlnews.com