Here’s Why The Federal Reserve Made A 50 Bps Interest Rate Cut

The US Federal Reserve decided on a 50 basis point (bps) interest rate cut following its FOMC meeting on September 18. This huge Fed rate cut raised eyebrows as this was only the third time in recent history that the Central Bank had begun a rate cut cycle with a 50 bps. However, in his speech, Fed Chair Jerome explained why they made this move.

Why The Federal Reserve Cut Interest Rates By 50 Bps

Jerome Powell stated that the Fed believes the US economy is “strong overall,” which prompted their decision to cut interest rates by 50 bps. Until now, the Federal Reserve has hesitated to start a rate cut cycle because inflation is still below its target of 2%.

However, Powell mentioned they are growing confident that inflation will drop to 2% despite this move. The job report is another inflation data point that raised concerns, but the Fed maintained that the labor market is still strong.

When quizzed about the rising layoffs, Jerome Powell remarked that they do not see any rising claims or layoffs. He added that they are also not hearing from companies about any imminent layoffs, suggesting that the unemployment claims were exaggerated.

Although the Fed Chair noted that they will continue to move “meeting-by-meeting,” his speech shows they are confident they can bring inflation down without the US economy entering a recession.

Renowned Economist Peter Schiff warned that the Federal Reserve’s interest rate cut decision could send the US economy into a recession and possibly lead to higher inflation. However, the market seems unbothered by such warnings, as it has reacted positively to the Fed’s dovish stance.

Meanwhile, the Fed revealed that there will likely be two more 25-basis-point rate cuts this year. They also forecast 100 bps rate cuts in 2025 and 50 bps in 2026.

A Bullish Perspective On The Fed’s Decision

Unlike Schiff, economist Alex Krüger provided a bullish perspective on the Federal Reserve’s 50 bps interest rate cut. He stated that the Fed’s announcement that there will be further cuts this year shows they are in control and not in “reactionary mode.” The economist believes the US economy is “doing very well” and noted that this is crucial for risk assets like Bitcoin.

He revealed that equities have rallied 10% in six months whenever the Fed begins its easing cycle with no recession. On the other hand, these stocks have fallen by 12% whenever the Central Bank begins the easing cycle during a downturn. That means that these equities and Bitcoin should perform well in the coming months since the US economy is currently not in a recession.

Indeed, the stock and crypto markets reacted positively following the Federal Reserve’s 50 bps interest rate cut decision. Bitcoin broke above $62,000, while altcoins also pumped following this macro decision. However, Krüger stated that Bitcoin’s path is still “heavily dependent” on who wins the US presidential elections.

He also advised market participants to max long alts early on Election Night if Trump is coming ahead in the counts. He added that this is what he plans to do.

Will History Repeat Itself?

Market analysis platform The Kobeissi Letter noted that the economy crashed the last time the Fed led with a 50 bps cut. These two previous times were in 2007 and 2001. In 2001, the S&P 500 is said to have fallen 31% after two years. Meanwhile, in 2007, the stock market fell 26% after two years.

The Nasdaq also suffered a similar fate. In 2001, the stock market suffered a 76% drop from top to bottom over three years. A similar occurrence happened in 2007 as the Nasdaq fell 56% from top to bottom in what turned out to be another historic bear market.

Bitcoin’s correlation with the stock market indicates that it could suffer a similar fate as these stocks if history were to repeat itself. For now, these risk assets continue to react positively to the Federal Reserve’s interest rate cut decision. The stock market is hitting new highs while the crypto market is also enjoying a bullish recovery with Bitcoin flipping $60,000 as support.