Source: WOO X Research

On September 19, 2024, the Federal Reserve cut interest rates by 50 basis points (bps), reducing the federal funds rate to between 4.75% and 5%. And cutting interest rates is an important tool used by the Federal Reserve to stimulate the economy during a slowdown or recession. Let's talk to WOO X Research to see how interest rate cuts will affect classified currencies in the next phase.

The Federal Reserve's interest rate cut means a reduction in the benchmark interest rate, which usually has a series of important effects on the economy. For example, lower borrowing costs can encourage businesses and consumers to increase loans, thereby stimulating investment and consumption; or cutting interest rates can help drive economic growth, because easier access to credit will increase market demand. Interest rate cuts are likely to affect inflation and drive up prices due to increased demand. At the same time, interest rate cuts also usually cause asset prices such as stocks and real estate to rise, and investors seek higher returns. Furthermore, interest rate cuts may also cause the local currency to depreciate, as investors will switch to other currency assets with higher returns. Overall, behind the Federal Reserve's current reduction of 50 basis points (bps), it shows that the Fed is concerned about the state of the US economy, and there may already be signs of a recession. For the cryptocurrency market, interest rate cuts are one of the positive news that the market is most concerned about since Bitcoin was halved. With interest rates lowered, investors may be more willing to participate in other asset investments.

Background (historical trend before and after interest rate cuts)

Judging from various economic indicators, the current economic situation shows quite a few downside risks, and interest rate cuts are needed to stimulate growth. The current value of the manufacturing PMI is 47.9, which is in a contraction range, indicating weak manufacturing activity; although the service sector PMI is 55.7, it is lower than the historical average. Furthermore, the current value of the unemployment rate is 4.2, and the CPI YoY and PCE are 2.5 and 2.6, respectively, which are below the historical average, indicating weak demand. What is more noteworthy is that the credit spread between 10-year and 1-year US bonds is -0.2, which is usually a sign of economic recession, while the financial condition index is -0.56, which indicates tightening financial conditions and may further inhibit economic activity. Against this backdrop of data, the Federal Reserve announced a 50 basis point (bps) cut in interest rates. Lowering interest rates encourages investors to invest in higher-return investment activities, which boosts the investment market; however, when large amounts of capital pour into the market, they have to face the risk of inflation and the possibility of economic system instability.

Data trends

In the context of interest rate cuts, fighting inflation that may be brought about by interest rate cuts is an issue that people need to seriously consider. In the past, people often chose gold as a hard currency to fight inflation. However, as the cryptocurrency market enters the eyes of more and more investors, known as “digital gold” — BTC is attracting more and more attention, especially after the adoption of the BTC Spot ETF, providing investors with a more secure way to invest.

Compare BTC (digital gold) price trends and gold (traditional)Safehaven assets) Price trends. It can be found that the two trends are strongly correlated, and changes in BTC prices have a certain lag in time compared to changes in gold prices, usually 2-5 months behind the trend of gold prices.

Gold mainly shows a negative correlation with major stock indices (General Poole Index, Nasdaq100 Index). In times of economic market turmoil, gold can be protected from risk.

However, Bitcoin has been showing a safe-haven trend similar to gold in the past six months, that is, it is weakly correlated and inversely correlated with mainstream stock market indicators. Moreover, with the same safe-haven properties, Bitcoin can achieve higher returns for investment safe-haven investors.

Possible future trends?

The US is the largest and most developed economy in the world, and the Fed's decision to cut interest rates is not only America's economic policy, but also a reference for other countries. Behind the Federal Reserve's interest rate cut by 50 basis points (bps), it also shows that the current economic situation cannot be overly optimistic. As can be seen from the previous data, before the interest rate cut, gold fluctuated greatly. After the announcement of the interest rate cut, BTC and other cryptocurrencies may experience a correction, but the favorable factors in the later stages are insufficient. Due to concerns about the economic recession, the market may easily fall into a state of turmoil and unease.