US Fed Interest Rate Cut Might Trigger ‘Sell-the-news’ Event

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As a seasoned analyst with over two decades of experience navigating market fluctuations and economic policy shifts, I find myself cautiously optimistic about the upcoming FOMC meeting next Wednesday. The potential for a 25-basis-point or 50-basis-point interest rate reduction has been a topic of intense debate among economists, traders, and investors alike.

It’s anticipated that the Federal Reserve in the United States might reduce interest rates by 0.25% on the following Wednesday. This potential reduction would occur during the next Federal Open Market Committee (FOMC) meeting, which is scheduled for September 18. Notably, renowned economist Steve Hanke suggests this move could cause a “sell-off” in risky assets such as Bitcoin (BTC).

The market expects a reduction of 25 basis points, so if the actual reduction is less, it might lead to a sell-off due to disappointment. However, a reduction of 50 basis points isn’t currently anticipated, and if it occurs, it could potentially boost the market.” – As stated by an economist from The Johns Hopkins University.

25-Basis-Point or 50-Basis-Point Interest Rate Reduction?

Based on data from the CME FedWatch tool, there’s a 57% chance that interest rates might be reduced by 0.25 percentage points and a 43% possibility of a more significant reduction by 0.5 percentage points. Interestingly, the likelihood of a 0.5 percentage point cut has risen significantly from just 13% to 43%. This situation has economist Hanke convinced that Bitcoin and other risky assets could see high volatility in the coming months prior to the US elections.

The economist highlighted fixed-income investments, such as the 10-year US Treasury bond and gold, as a shield for this potential situation. In his opinion, these traditional assets are a preferred investment alternative when heightened volatility hits the market. Leena ElDeeb, a profound analyst at 21Shares Research, also weighed in on the interest rate cut.

An independent journalist believes a market reaction might occur if the Federal Reserve decides on a 0.5% reduction. She didn’t overlook the possibility that such a move could instill caution among investors. In simpler terms, making a cut of 0.5% may signal to markets that the Fed is reacting to potential signs of economic downturn or recession.

“A more aggressive rate cut could shock the markets, given that it would ring alarm bells for a recession. Investors would trade cautiously to weather market conditions, which could hurt risk-on assets in the short term,” ElDeeb wrote in an email.

More Entities Tilt Towards a 50-Basis-Point

A number of entities, such as the previous President of the New York Federal Reserve, Bill Dudley, are advocating for a half-point reduction. During his speech at the Bretton Woods Committee’s annual Future of Finance Forum in Singapore, he highlighted compelling reasons that could potentially influence the Federal Reserve to make this move.

Dudley explained that the actual interest rate is currently about 1.5% to 2% higher than the supposedly neutral rate for the US economy. At this ‘neutral’ rate, monetary policy isn’t either tightening nor easing. Essentially, he posed the question: “Why wait any longer?” or “What are we waiting for?

As I observe the current market trends, Bitcoin is sitting at $57,872.34, showing a modest 0.17% increase over the past day. If we were to see a rate cut, it’s plausible that Bitcoin and other inflation hedges might surge significantly. This is due to the fact that rate cuts tend to diminish the value of the U.S. Dollar, which in turn boosts the appeal of Bitcoin as a hedge against inflation.

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2024-09-13 18:54