Federal Reserve Rate Cuts and Bitcoin Bull Market

In the previous article (September 16), we mainly discussed four macro factors to pay attention to in the coming year, including the issue of interest rate cuts by the Federal Reserve. The interest rate decision by the U.S. today (September 18, which is 2:30 AM on September 19 Beijing time) is considered a global focus this week. The market has been anticipating a rate cut from the Federal Reserve for more than two years, and we should have a conclusion this week.

According to the latest betting data from prediction platforms, the probability of a 50bps rate cut has gained the upper hand, currently at 57%, while the probability of a 25bps cut has dropped to 43%. The total bets in this prediction pool have now exceeded $49 million. As shown in the figure below.

Although the prediction data suggests that a 50bps cut seems to have the upper hand, the possibility of a 25bps cut still stands at 43%. In fact, the difference in odds between these two figures is not very large, leaving some suspense. As we mentioned in the previous article, the market's divergence still seems significant. From the current situation, the market should have reinforced the expectation of a 25bps cut, and what is most concerning (or worrying) now is whether the market has already priced in the expectation of a 50bps cut.

However, regardless of whether the cut this month is 25bps or 50bps, it could have a significant impact on the short-term financial markets (including the crypto market). This means that short-term volatility may still be considerable, and it is advisable to watch more and act less. As for the final outcome, we will only know by tomorrow morning. I wonder how many friends will choose to stay up late?

Personally, to be honest, I am not very concerned about such short-term market changes because, in the long run, these short-term fluctuations are not important. If we broaden our perspective, it is expected that the Federal Reserve will lower interest rates to around 3.00% in the next 1-2 years (maybe 2-3 years), and at the same time, most countries around the world will also follow suit.

1. Why does the Federal Reserve want to cut interest rates?

Typically, when the U.S. economy slows down, the Federal Reserve will lower interest rates to reduce borrowing costs for businesses and consumers, encouraging spending and investment to boost the U.S. economy. In other words, people (including companies) will obtain more loans, the Federal Reserve will print money, and then this money will enter circulation (which may also lead to a new round of inflation).

Here, we can briefly review the rate cuts in 2020:

Before the COVID-19 pandemic, the Federal Reserve's interest rates were at a relatively historical low of 1.5% - 1.75%. However, with the outbreak of COVID-19, the Federal Reserve made two emergency rate cuts within a month (in March 2020):

• The first was 50 bps (0.5%)
• The second was 100 bps (1%)

This brought the interest rate down to 0% to 0.25%, essentially making borrowing extremely cheap, as the significant reduction in borrowing costs led to a surge of liquidity entering the market.

Although inflation did not immediately spike at that time, the influx of liquidity also caused supply chain issues and increased consumer demand, leading to a surge in inflation in 2021. To respond to this situation, the Federal Reserve began a series of rate hikes starting in 2022, raising rates to the current range of 5.25% - 5.50%.

In simple terms, rate cuts and hikes are part of a cyclical game of "extreme opposites," but this game also determines the direction of the global economy, creating cycles of disaster and opportunity (while seeing disasters, we must also actively think and seize some opportunities).

2. The impact of Federal Reserve rate cuts on the crypto market

The Federal Reserve's rate cuts affect global financial markets, which certainly includes the higher-risk crypto market.

The rate cuts in 2020 were a major driving force behind the rapid growth of the crypto industry, as cheap liquidity and lower borrowing costs prompted investors to turn to higher-risk, high-growth assets. Then, in 2021, the crypto market also welcomed a new bull market. As shown in the figure below.

Therefore, many analysts believe that Bitcoin may experience a real new bull market in 2025.

However, from the current macro environment, due to the absence of a direct stimulus like the COVID-19 black swan event, this time the Federal Reserve's rate cuts are expected to be gradual and slow, rather than sharp and drastic. Most people predict that the first cut will be either 25 bps or 50 bps.

Regarding this rate cut, I have noticed some discrepancies among institutions, such as:

• JPMorgan expects a 50 bps cut
• Morgan Stanley expects a 25 bps cut (with a total expected cut of 75 bps by the end of 2024)
• Bank of America expects a 25 bps cut

In summary, we can also find that there are some differences between the rate cuts in 2020 and those expected this year:

First, concerns about inflation. The 2020 rate cuts were mainly due to the outbreak of the pandemic, while this year's rate cuts have inflation as a key core issue, which will make the Federal Reserve more cautious in its specific operations.

Second, starting interest rates. Compared to the interest rates of less than 2% in 2020 (which were close to zero after two cuts), the current rates (5.25% - 5.50%) are much higher.

Third, the pace of rate cuts. The rate cuts expected to begin this year are likely to be gradual, which is different from the sharp cuts taken in 2020 to respond to the pandemic.

Therefore, we believe that from a slightly longer-term perspective, this rate cut will definitely be beneficial for Bitcoin and the entire crypto market overall, but the impact may not be as significant as the rate cuts in 2020. The 2020 rate cuts occurred under special circumstances, and we are unlikely to see a direct large-scale bull market triggered by this year's cuts. Additionally, apart from the rate cuts themselves, the crypto market has also faced some issues it needs to address after two years of development (such as a large number of new projects further diluting liquidity).

But regardless, we still hold on to the statement from a few days ago: the crypto market in 2025 is still worth looking forward to, and we will always maintain an optimistic attitude towards the long-term development of the crypto field, as long as we hold onto our assets and continue to be patient.

3. The impact of Federal Reserve rate cuts on the stock market

The stock market mentioned here mainly refers to the U.S. stock market; I am not familiar with the A-share market and don't know what to say. In theory, as we mentioned earlier, as long as the Federal Reserve cuts rates, most countries' currencies should also follow suit, including the Renminbi, which will certainly provide some operational space for the Renminbi, as the pressure on the exchange rate decreases. However, how much operational space this will provide for the A-share market, or how much opportunity it will create for people to earn more Renminbi, is hard to say.

When it comes to the U.S. stock market, we may need to consider the question we raised in the previous article (September 16): Typically, the first rate cut is seen as bearish only under the expectation of an economic recession. However, in a non-recession period, the first rate cut can also be seen as bullish.

So, is the U.S. economy currently in a recession?

Taking the S&P 500 as an example, historical data shows that if the U.S. economy enters a recession, the average return of the S&P 500 index in the year following the first rate cut is -12%. If there is no recession, the average return of the S&P 500 index in the year following the first rate cut is +13%. As shown in the figure below.

However, the key to this question is that we will only know whether a recession has occurred a few months after the official rate cut.

Currently, regarding whether the U.S. economy is truly in a recession, there seems to be some controversy in the market. At the time of writing this article, I checked the prediction platform again, and currently, the bets on a recession in 2024 are only at 7%. As shown in the figure below.

Typically, economic recessions often require the Federal Reserve to implement larger rate cuts. If we look at historical data, since 1960, whenever the market expects a 200 basis point rate cut, a recession tends to hit within a few months.

Some analysts believe that the likelihood of a recession in 2025 is much higher, estimating that the probability of a recession before 2026 is about 56% (let's take it step by step; perhaps this prediction will change completely in a few months).

At least at this stage, we have not seen any effective evidence that the U.S. is experiencing a recession.

Regarding the question of whether the U.S. economy is in recession, let's also look at some institutional views:

• James Reilly, a senior market analyst at Capital Economics, stated: Based on previous easing cycles, our expectations for the Federal Reserve to cut rates significantly without a recession in the U.S. align with the statistical performance of strong returns in the U.S. stock market.

• Dirk Willer, global head of Citi, stated: If the economy faces a hard landing (forcing the Federal Reserve to cut rates more significantly than expected), a lot of funds will flow into the bond market. If it is a soft landing, the situation becomes quite unclear.

• Yung-Yu Ma, chief investment officer at Bank of Montreal Wealth Management, stated: The U.S. economic growth is still slightly better than that of most countries.

• Rick Rieder, head of BlackRock's global asset allocation investment team, stated: The U.S. economy is slowing down but is still in relatively good shape; I believe a recession is not imminent.

In summary, the Federal Reserve's rate cuts will have significant impacts on the crypto market, the stock market, and other asset classes such as gold and silver.

Now that we have understood the issues regarding economic recession, the next core question seems to become: Can the Federal Reserve avoid the occurrence of an economic recession?

If so, then in the short term, we may see some new opportunities in the fourth quarter of this year. However, regardless of how likely this opportunity is or how long it can last, the most important thing remains what we have emphasized in previous articles: to continue to manage risks and positions effectively.