The Federal Reserve is poised to slash interest rates for the first time in four years at Wednesday’s FOMC meeting.
The debate centers on whether the cut will be 25 or 50 basis points.
As of Monday, the market leans toward the bolder 50-point cut, with a 65% probability, according to CME Group’s FedWatch, a jump from last week’s 30%.
Here’s what to expect if you’re waiting for a tech or crypto bull run.
1. The market always dumps after FOMC rate cuts start. Why would it be any different now?
Historically, this statement is only partially true.
If you look at the reaction of the S&P 500 to rate cuts, the immediate reaction is usually to the downside. If true, crypto correlates around ~0.8 with the stock market. So it will impact it accordingly.
However, when you start looking further out, you can see strength. What matters most is whether we are in a recession or not.
Remember that cutting into a recession creates a fake rally that dies almost immediately. That’s why it’s important to figure out which we are in.
Based on all the economic data thus far, it seems more likely that we’re headed toward a recession cycle, but it is not impossible (yet) to achieve a soft landing.
If the labor market doesn’t cool but remains robust, recession can be postponed for months until the back of the consumer breaks.
Keep in mind the labor market is just now reaching the normalcy of pre-pandemic.
2. What’s the scenario if we see a 50bp cut at FOMC?
What’s the scenario if we see a 50bp cut?
Way worse than you think. The likelihood that we’re hitting a recession is higher.
The Fed cutting 50bp means they see problems that other people don’t see, and sentiment changes to risk-off. This is similar to how markets rallied when the Fed originally raised rates to 5% because the economy was strong enough to “take them.” Additionally, it could cause a yo-yo effect, sending inflation high again.
The whole pump seems to be based on former New York Fed President Bill Dudley saying there was a strong case for a 50-bps interest rate cut. A couple of articles were also published in the Wall Street Journal and the Financial Times suggesting that a 50-bps move was still in play.
We still think a 50bp cut will lead to a rally, but it will be much more short-lived than if it were 25.
As Investopedia posted last week: “Over the last 20 years, most 50-basis-point cuts have come amid or immediately before a full-blown economic crisis.”
The tl;dr is that 25bp = soft landing. 50bp cut means the Fed sees something wrong.
3. When will crypto pump again?
We’re bullish on the FOMC rate cuts, but we don’t think they will fuel a sustained rally. Equities are overpriced, and economists like Arthur Hayes still see us going down to $50,000 BTC before the end of the year.
As market participants rush to buy in the “soft landing,” flows will be supportive until the end of the month. Because so much will be priced so quickly, October will be a serious risk period.
October might see a severe decline before December, which makes a lower high. Next year will be a repeat of 2022.
Thankfully, like in 2022, the Fed will have to turn the money printers on to prevent a bank run (if a recession is coming). Burr baby burr.
All of this would be a lot easier if the lunar eclipse held the keys to the bull run, which began when Jupiter and Pluto exited retrograde on October 7th and 10th, respectively. But that’s how it goes in US economics: a total mess.
