Looking back at the Fed’s history of interest rate cuts, can this round of rate cuts pull Bitcoin back into a bull market?

Original title: "Bigger is coming, can it pull Bitcoin back to the bull market?"

Original author: Huo Huo, Vernacular Blockchain

On August 5, the Bank of Japan's interest rate hike triggered a violent shock in the global financial market. Japanese and US stocks collapsed, the Bitcoin panic index in the crypto market soared by nearly 70%, and many national stock markets were circuit-breakers several times. Even European and emerging market stock markets also suffered a significant blow. Under huge market pressure, people began to seek a good way to alleviate the situation and called on the Federal Reserve to cut interest rates to save the market. The Fed's interest rate hike may come soon, which means that "bigger" than the Bank of Japan's interest rate hike is coming. Can it pull Bitcoin back to the bull market?

01 Why is the Federal Reserve so influential?

1) What is the Federal Reserve?

Before understanding the concept and impact of the Fed's interest rate hikes and cuts, we first need to know what the Fed is.

The Federal Reserve, or the Federal Reserve Board of the United States, is the central banking system of the United States, consisting of 12 regional Federal Reserve banks. Its goal is to stabilize prices and maximize employment by regulating monetary policy. Indicators such as inflation and employment rates are crucial to economic health, and they are also indicators that investors and market participants pay close attention to in order to judge economic prospects and investment risks.

Therefore, as the central bank of the United States, the Federal Reserve has a huge influence on the financial market, so how does the Federal Reserve exert its influence? It is mainly through the following monetary policy tools that it adjusts interest rates and thus affects the economy, that is, raising or lowering interest rates:

Raising interest rates means raising the cost of borrowing between banks, thereby raising the interest rates of commercial banks' loans to enterprises and individuals:When the Fed raises interest rates, the deposit interest rate of the US dollar rises, and depositors receive higher interest income, which leads to capital inflows into the United States, reducing investment in other countries, worsening the economic environment, and rising unemployment. High interest rates also increase borrowing costs, leading to an increase in the risk of corporate and individual defaults, which may trigger corporate bankruptcy.

Lowering interest rates, on the contrary, will reduce deposit rates and borrowing costs: When the Fed cuts interest rates, the US dollar deposit interest rate falls, capital flows out of banks and flows to other countries, promoting global investment and economic recovery.

So how many times has the Fed cut interest rates before? What impact did each bring?

2) The history of interest rate cuts

Looking back at history, the Federal Reserve has experienced 6 rounds of relatively obvious interest rate cuts since the 1990s. From the perspective of the model, there are 2 preventive interest rate cuts, 3 relief interest rate cuts, and 1 mixed interest rate cut that is a combination of preventive interest rate cuts and relief interest rate cuts.

First, let's clarify the differences between these types of interest rate cuts:

Preventive interest rate cuts refer to the monetary authorities taking forward-looking policies to adjust interest rates when the economy shows signs of downturn or faces potential external risks, in order to reduce the risk of recession and promote a "soft landing" of the economy. Features include: a shorter interest rate cut cycle, a moderate first interest rate cut, a limited number of interest rate cuts, and the federal funds rate will not fall below 2%.

Relief-style interest rate cuts are continuous and substantial interest rate cuts taken by monetary authorities when there is a threat of severe economic recession or a major shock, aimed at helping the real economy and residents, avoiding severe recession and promoting economic recovery. Features include: a long interest rate cut cycle (may last 2-3 years), a steep interest rate cut (may be continuous and substantial interest rate cuts in the early stage), a strong first interest rate cut (usually more than 50 basis points), and a large total interest rate cut (the final interest rate falls below 2% or close to zero).

In contrast, a hybrid interest rate cut cycle is more complex. It may appear as a conventional preventive interest rate cut in the early stage, but due to the rapid change in the situation, it may turn into a relief-style interest rate cut in the later stage.

So, what impact have the several significant interest rate cut cycles experienced by the Federal Reserve since the 1990s had on the market and the economy?

· 1990-1992:

Rate Cuts: During this cycle, the Fed cut the federal funds rate from 9.810% to 3.0%.

Market Impact: This round of rate cuts helped support the economy's recovery from the 1990 recession. Stocks began to rise during this period, economic growth gradually resumed, and although inflation and unemployment remained under pressure, overall economic conditions gradually improved.

· 1995-1996:

Rate Cuts: The Fed began cutting rates in 1995, lowering the federal funds rate from 6.0% to 5.25%.

Market Impact:This round of rate cuts was primarily intended to respond to slowing economic growth and support stock market gains and economic stability. This phase marked a continuation of economic expansion, with strong stock market performance, particularly benefiting technology stocks, which was followed by the tech boom of the 1990s.

· 1998 (September-November)

Rate Cuts:The federal funds rate was cut from 5.50% to 4.75%.

Market Impact:It eased market tensions and supported economic growth. The rate cuts had a positive impact on the stock market, especially as technology stocks rebounded strongly, and the Nasdaq index rose sharply in 1998, laying the foundation for the subsequent tech boom.

· 2001-2003:

Rate Cuts: During this cycle, the Fed cut interest rates from 6.5% to 1.00%.

Market Impact: This rate cut was made after the 2001 recession. The rate cuts helped support the economic recovery and boosted stock market gains in 2002 and 2003. However, the excessive easing of this round of rate cuts also laid the groundwork for the subsequent real estate bubble and financial crisis.

· 2007-2008:

Rate Cuts: The Fed cut interest rates from 5.25% to near zero (0-0.25%).

Market Impact:This round of rate cuts was in response to the severe impact of the 2008 financial crisis. The low interest rate policy effectively eased the pressure on financial markets, supported the recovery of the economy and financial markets, and promoted the strong rebound of the stock market after 2009.

· 2019-2020:

Rate Cuts:The Federal Reserve cut interest rates from 2.50% to near zero (0-0.25%) in 2019 and 2020.

Market Impact:The rate cuts were initially mainly in response to the economic slowdown and global uncertainty. After the outbreak of the epidemic, further rate cuts and large-scale monetary stimulus measures helped stabilize financial markets and support economic recovery. The stock market experienced a rapid rebound in 2020. Although the epidemic caused a severe economic shock, policy measures mitigated some of the negative impact. This round of interest rate cuts also indirectly contributed to the crypto 312 incident.

It can be said that each interest rate cut cycle has a different impact on the market and the economy, and the policy making of interest rate cuts will also be affected by the economic environment, market conditions and global economic situation at the time.

3) Why is the Fed so influential?

The Fed has a huge impact on the global financial market, so its policies directly affect global liquidity and capital flows. The specific impacts are divided into the following points:

Global reserve currency:The US dollar is the world's main reserve currency, and most international trade and financial transactions are denominated in US dollars. Therefore, changes in the Fed's monetary policy will directly affect the global financial market and economy.

Interest rate decisions:The Fed's interest rate policy has a direct impact on the interest rate level of the global financial market. The Fed's interest rate hikes or cuts will lead other central banks to follow suit and adjust their policies. This interest rate transmission mechanism makes the Fed's policy decisions have a profound impact on global capital flows and financial market trends.

Market expectations:The Fed's remarks and actions often cause fluctuations in global markets. Investors pay close attention to the direction of the Fed's policies, and the market's expectations of the Fed's future policies will directly affect asset prices and market sentiment.

Global economic linkage:Since the global economy is highly interconnected, the economic conditions of the United States, as the world's largest economy, also have an important impact on the economies of other countries. The Fed regulates the US economy through monetary policy, which will also affect the trend of the global economy.

Risk asset price fluctuations:The Fed's policy measures have an important impact on the prices of risky assets (such as stocks, bonds, and commodities). The market's interpretation and expectations of the Fed's policies will directly affect the volatility of the global risk asset market.

In general, due to the importance of the US economy and the global status of the US dollar, the Fed's policy measures have a profound and direct impact on the global financial market, so its decisions have attracted much attention from the global market.

So what will be the intensity, speed and frequency of the upcoming Fed rate cut cycle? How long will the entire rate cut cycle last? How will it affect the global financial market?

02 How to view the Fed’s current round of rate cuts

1) Expectations for this round of rate cuts

As we enter the third quarter of 2024, there are signs in the domestic market that monetary policy may need to be adjusted.Unemployment rate, employment, wage growth and other data show that market activity has declined, the decline of technology stocks shows that economic growth has slowed, and the United States still has a huge amount of outstanding debt interest.There are signs that the Federal Reserve needs to cut interest rates to promote consumption, revitalize the economy, and over-issue currency. Before Black Monday, the market generally predicted that the Federal Reserve may start cutting interest rates as early as September this year.

According to market expectations, Goldman Sachs had previously expected the Federal Reserve to cut interest rates by 25 basis points in September, November and December, and pointed out that if the August employment report is weak, it may cut interest rates by 50 basis points in September. Citigroup also predicted that interest rates may be cut by 50 basis points in September and November. JPMorgan Chase economists adjusted their forecasts and believed that the Federal Reserve may cut interest rates by 50 basis points in September and November, and mentioned that emergency interest rate cuts may be made between meetings.

After Black Monday, some radical analysts believe that the Fed may take action before the September meeting, with a probability of a 25 basis point rate cut of 60%. This situation is extremely rare and is generally used to deal with serious risks. The last emergency rate cut occurred at the beginning of the epidemic.

However, the uncertainty of the global economic trend, including the US economy, is still very large. Major institutions have different conclusions on whether this round of rate cuts is a preventive rate cut or a relief rate cut. The impact of the two on the market is also very different, and further observation is needed.

2) Possible impact of this round of Fed rate cuts

The Fed's interest rate cut expectations have begun to affect global financial markets and capital flows. In order to cope with the downward pressure on the economy, the interest rate cut bets of the Bank of England and the European Central Bank are also heating up. Previously, some investors believed that the probability of the Bank of England cutting interest rates in September is now more than 50%. For the ECB, traders expect two rate cuts by October, and the expectation of a sharp rate cut in September is not far away.

Next, let's take a look at some of the possible effects of this round of rate cuts:

A. Impact on global markets

This Fed rate cut is expected to have a significant impact on global financial markets.

First, the reduction in US dollar interest rates may prompt funds to flow to markets and assets with higher yields, leading to an increase in global capital flows.

The rate cut may also depreciate the US dollar, which may trigger exchange rate fluctuations and push up the prices of dollar-denominated commodities such as crude oil and gold. In addition, the depreciation of the US dollar may enhance the competitiveness of US exports, but it may also exacerbate international trade tensions.

At the same time, interest rate cuts may reduce borrowing costs for global stock markets, boost corporate profit expectations, and thus drive stock markets higher.

The reduction in international capital costs will encourage more investment, but will have limited impact on countries and companies that are already highly indebted.

Because although the reduction in international capital costs will encourage investment, highly indebted countries and companies may find it difficult to use these low-cost funds for new investments due to debt pressure and strict borrowing conditions.

Finally, interest rate cuts may bring global inflationary pressures, especially when currencies depreciate and commodity prices rise, which will have an impact on economic stability and central bank policies.

B. Will interest rate cuts directly benefit the crypto market?

Although many people believe that interest rate cuts increase market liquidity, reduce borrowing costs, and may push up cryptocurrency prices, and that in an interest rate cut environment, economic uncertainty increases, and investors may turn to safe-haven assets such as Bitcoin, there are also reservations that the need to be vigilant against the potential risk of economic recession.

However, many institutions generally believe that in a complex and changing market environment, the market may also experience significant fluctuations during interest rate cuts. During the 2008 financial crisis, even though the Federal Reserve took interest rate cuts in the early stages, the market still fell sharply after a brief high. Although the Federal Reserve quickly and significantly lowered interest rates, it failed to effectively curb the spread of the crisis. The roots of this crisis can be traced back to the successive bursts of the Internet bubble and the real estate bubble, which had a profound recessionary impact on the economy.

Whether the current interest rate cut policy will repeat the same mistakes and trigger outbreaks such as the artificial intelligence bubble or the US debt crisis, thereby dragging down the crypto market, remains to be seen.

However, in the short term, the interest rate cuts by global central banks, represented by the Federal Reserve, are a shot in the arm for the global financial market and the crypto market. There is no doubt that the expectation of interest rate cuts will directly promote the increase of market liquidity, trigger market optimism, and is expected to prompt the cryptocurrency market to usher in a wave of rising prices in the short term, bringing investors opportunities for quick profits.

In the long run, the trend of the cryptocurrency market will be affected by more complex and changeable factors, and price fluctuations are not only driven by a single factor, but also require comprehensive analysis:

First, the market trend mainly depends on the strength of economic recovery. If interest rate cuts can promote economic growth, the cryptocurrency market may benefit; on the contrary, if the economic recovery is weak and market confidence weakens, cryptocurrencies will inevitably be affected. During the COVID-19 pandemic, Bitcoin was affected by the stock market and commodities and also experienced a 312 crash. Markus Thielen of 10x Research recently pointed out that the U.S. economy is weaker than the Federal Reserve expected. If the stock market follows the decline of the ISM manufacturing index, the price of Bitcoin may continue to fall. In addition, investors may sell Bitcoin when the economy is in recession.

Secondly, inflation factors need to be considered. The central bank cuts interest rates to stimulate the economy and promote consumption, but it may also lead to inflation risks such as rising prices. Then rising inflation will in turn lead to the central bank raising interest rates, which will bring new pressure to the crypto market.

Third, the US election and global regulatory changes also have far-reaching impacts. Who will be the new president of the United States? It is still unknown what policy the new president will adopt towards crypto.

In short, the prelude to interest rate cuts opened by global central banks has undoubtedly brought new opportunities and challenges to the crypto market. The interest rate cut is likely to provide liquidity support for crypto assets in the short term, which includes factors such as increased liquidity and increased risk aversion. But it also faces the lessons of historical financial crises and challenges from other complex factors. It is difficult to guarantee that it will be beneficial to the development of crypto for the time being.

03 Summary

In general, this Black Monday was caused by concerns about the US economic recession, which led to the collapse of the market. In addition, industry giants were not optimistic about the US economic outlook and global geopolitical turmoil. In the short term, these will keep the market in a period of policy fluctuations.

According to the cyclical laws of finance in the past, crises and opportunities are born together.Generally, economic downturns, market fluctuations and investment losses may bring about anxiety and panic, and also provide investors and companies with an opportunity to regroup and find innovative opportunities. At the same time, the crisis forces companies to improve their business models and improve efficiency, so as to develop more steadily in the future.

However, what is the final trend of this round? How long will the negative impact of the crisis last? Can the market really improve after the Fed really cuts interest rates? What do you think about these? Welcome to chat in the comment area.

Original link