The global financial markets experienced significant turbulence on August 5th, following the Bank of Japan's interest rate hike. Stock markets in Japan and the U.S. plummeted, Bitcoin's fear index surged nearly 70%, and multiple national stock markets triggered circuit breakers repeatedly. Even European and emerging market stocks faced noticeable declines. Under immense market pressure, investors began seeking relief, calling for the Federal Reserve to implement rate cuts to stabilize the situation. A Fed rate cut may arrive soon, potentially representing an event even more impactful than the Bank of Japan's hike. But can it pull Bitcoin back into a bull market?
Why Is the Federal Reserve So Influential?
What Is the Federal Reserve?
To understand the concepts of Fed rate hikes and cuts and their effects, we first need to know what the Federal Reserve is.
The Federal Reserve (Fed) is the central banking system of the United States, consisting of 12 regional Federal Reserve Banks. Its goals are to stabilize prices and maximize employment through monetary policy adjustments. Indicators like inflation and employment rates are crucial for economic health, making them key metrics closely watched by investors and market participants to gauge economic prospects and investment risks.
As the U.S. central bank, the Fed wields significant influence over financial markets. It primarily exerts this influence through monetary policy tools that adjust interest rates, thereby impacting the economy via rate hikes or cuts:
- Rate hikes increase the cost of borrowing between banks, leading to higher lending rates for businesses and individuals. When the Fed raises rates, U.S. dollar deposit rates rise, offering savers higher interest income. This attracts capital inflows into the U.S., reducing investment in other countries, worsening economic conditions, and increasing unemployment. Higher rates also raise borrowing costs, increasing default risks for businesses and individuals, potentially triggering corporate bankruptcies.
- Rate cuts have the opposite effect, lowering deposit rates and borrowing costs. When the Fed cuts rates, U.S. dollar deposit rates fall, causing capital to flow out of banks and into other countries, promoting global investment and economic recovery.
So, how many times has the Fed cut rates in the past, and what were the effects?
A History of Rate Cuts
Since the 1990s, the Fed has undergone six distinct rate-cutting cycles. These include two preventive cuts, three relief cuts, and one hybrid cycle combining both preventive and relief measures.
First, let’s clarify the differences between these types of cuts:
- Preventive cuts occur when monetary authorities adjust rates preemptively in response to signs of economic downturn or potential external risks. These cycles are typically shorter, with modest initial cuts and limited frequency, and the federal funds rate usually doesn’t fall below 2%.
- Relief cuts are implemented during severe economic threats or major shocks. They involve consecutive, sharp reductions to support实体经济 and households, avoiding deep recessions and fostering recovery. These cycles are longer (often 2–3 years), feature steep initial cuts (often over 50 basis points), and result in significantly lower rates (often below 2% or near zero).
- Hybrid cycles are more complex, starting as preventive measures but potentially shifting to relief mode if conditions deteriorate rapidly.
Now, let’s examine the significant rate-cutting cycles since the 1990s and their impacts on markets and the economy.
1990–1992:
- Rate cuts: The Fed lowered the federal funds rate from 9.81% to 3.0%.
- Market impact: These cuts aided recovery from the 1990 recession. Stocks began to rise, and economic growth gradually resumed, though inflation and unemployment remained pressures.
1995–1996:
- Rate cuts: Rates were reduced from 6.0% to 5.25%.
- Market impact: This cycle aimed to address slowing growth, supporting stock gains and economic stability. It marked a continuation of economic expansion, with strong stock performance, particularly in tech stocks, leading to the dot-com boom.
1998 (September–November):
- Rate cuts: Rates fell from 5.50% to 4.75%.
- Market impact: The cuts eased market tensions and supported growth. Tech stocks saw a strong rebound, with the NASDAQ rising sharply, laying the groundwork for the subsequent tech boom.
2001–2003:
- Rate cuts: Rates were slashed from 6.5% to 1.00%.
- Market impact: These cuts followed the 2001 recession, aiding recovery and driving stock gains in 2002–2003. However, excessive easing also planted seeds for the housing bubble and subsequent financial crisis.
2007–2008:
- Rate cuts: Rates dropped from 5.25% to near zero (0–0.25%).
- Market impact: These measures responded to the 2008 financial crisis, easing financial market pressures and supporting recovery. They contributed to strong stock market rebounds post-2009.
2019–2020:
- Rate cuts: Rates were reduced from 2.50% to near zero (0–0.25%).
- Market impact: Initial cuts addressed economic slowing and global uncertainty. Post-pandemic, further cuts and massive stimulus helped stabilize markets and support recovery. Stocks rebounded quickly in 2020, despite severe economic shocks. These cuts indirectly contributed to the crypto "312" crash.
Each rate-cutting cycle had distinct effects, shaped by the economic environment, market conditions, and global trends.
Why Is the Fed So Influential?
The Fed’s policies directly impact global liquidity and capital flows due to the U.S. dollar’s central role. Key aspects of its influence include:
- Global reserve currency: The U.S. dollar is the primary reserve currency, used in most international trade and financial transactions. Thus, Fed policy changes directly affect global markets.
- Interest rate decisions: Fed rate adjustments influence global interest levels, often prompting other central banks to follow suit. This传导机制 shapes capital flows and market trends worldwide.
- Market expectations: Fed statements and actions frequently trigger global market volatility. Investors closely monitor Fed policy outlooks, which directly affect asset prices and sentiment.
- Global economic linkages: As the largest economy, U.S. economic conditions significantly impact other nations. Fed policy adjustments ripple through the global economy.
- Risk asset volatility: Fed policies heavily influence risk assets like stocks, bonds, and commodities. Market interpretations of Fed actions drive global risk asset fluctuations.
In summary, the Fed’s decisions have profound and direct effects on global financial markets due to the U.S. economy’s size and the dollar’s status, making its policies a focal point for investors worldwide.
For the upcoming rate-cutting cycle, key questions remain: How forceful, rapid, and frequent will cuts be? How long will the cycle last? And how will it impact global financial markets?
Perspectives on the Upcoming Fed Rate Cuts
Expectations for This Cycle
Entering Q3 2024, domestic U.S. indicators suggested a potential need for monetary policy adjustment. Data on unemployment, job numbers, and wage growth pointed to reduced market activity, tech stock declines indicated slowing growth, and the U.S. faced massive outstanding debt interest payments. These signs implied the Fed might need to cut rates to stimulate consumption, revitalize the economy, and increase money supply. Before "Black Monday," market consensus predicted the Fed could start cutting rates as early as September 2024.
According to expectations, Goldman Sachs previously forecasted 25-basis-point cuts in September, November, and December, noting that weak August jobs data might prompt a 50-basis-point cut in September. Citi also projected possible 50-basis-point cuts in September and November. JPMorgan economists adjusted predictions, suggesting 50-basis-point cuts in September and November, with potential emergency inter-meeting cuts.
Post-"Black Monday," some analysts激进地认为 the Fed might act before its September meeting, with a 60% probability of a 25-basis-point cut—a rare move typically reserved for severe risks. The last emergency cut occurred during the early pandemic.
However, uncertainty remains high regarding the U.S. and global economic trajectories. Whether this cycle will be preventive or relief-oriented is debated among institutions, with significant implications for markets. Further observation is needed.
Potential Impacts of This Cycle
Expectations of Fed rate cuts are already influencing global financial markets and capital flows. In response to economic pressures, rate cut bets are warming for the Bank of England and European Central Bank. Some investors believe the probability of a BoE cut in September exceeds 50%. For the ECB, traders anticipate two cuts by October, with significant September cuts not far off.
Next, let’s explore potential impacts of this rate-cutting cycle:
A. Effects on Global Markets
This Fed rate cut is expected to significantly impact global financial markets.
- First, lower U.S. rates may drive capital toward higher-yielding markets and assets, increasing global fund flows.
- Rate cuts could also lead to dollar depreciation, potentially causing exchange rate volatility and boosting prices of dollar-denominated commodities like crude oil and gold. Additionally, a weaker dollar may enhance U.S. export competitiveness but could intensify international trade tensions.
- Simultaneously, rate cuts may reduce borrowing costs for global equities, boosting corporate profit expectations and driving stock gains.
- Lower international capital costs will encourage more investment, but highly indebted countries and companies may struggle to leverage these cheap funds due to debt pressures and strict borrowing conditions.
- Finally, rate cuts may bring global inflation pressures, especially if currency depreciation and commodity price rises affect economic stability and central bank policies.
B. Will Rate Cuts Directly Benefit Crypto Markets?
While many believe rate cuts increase market liquidity, lower borrowing costs, and potentially push cryptocurrency prices higher—with economic uncertainty driving investors toward safe-havens like Bitcoin—some caution against potential recession risks.
Most institutions agree that in complex and volatile market environments, rate-cut periods can also bring significant volatility. During the 2008 financial crisis, even with initial Fed cuts, markets briefly peaked then plummeted. The Fed’s rapid, deep rate cuts failed to contain the crisis, rooted in the dot-com and housing bubbles' bursts, which caused severe economic recession.
Whether current rate cuts will repeat history, triggering AI bubbles or U.S. debt crises and dragging down crypto markets, remains to be seen.
However, short-term, rate cuts by the Fed and other global central banks could act as a stimulant for global financial markets and crypto. Undoubtedly, rate cut expectations will directly boost market liquidity, trigger optimism, and potentially lead to a short-term rally in cryptocurrencies, offering quick profit opportunities.
Long-term, cryptocurrency market trends will be influenced by more complex factors, and price movements aren’t driven by单一因素 alone. Comprehensive analysis is needed:
- First, market trends depend heavily on economic recovery strength. If rate cuts spur growth, crypto may benefit;反之, weak recovery could dampen confidence, affecting crypto. During the 2020 pandemic, Bitcoin crashed alongside stocks and commodities in the "312" event. Markus Thielen of 10x Research recently noted that if U.S. economic weakness persists per ISM data, Bitcoin may decline further, and investors might sell during downturns.
- Second, inflation must be considered. Central banks cut rates to stimulate economy and consumption, but this may cause物价上涨 inflation risks. Rising inflation could then lead to rate hikes, pressuring crypto markets anew.
- Third, U.S. elections and global regulatory changes have profound effects. Who will win the presidency? New policies toward crypto remain uncertain.
In summary, global central banks' rate cuts bring new opportunities and challenges for crypto markets. Cuts will likely provide short-term liquidity support—including favorable liquidity increases and safe-haven demand—but face lessons from historical crises and other complex challenges, making guaranteed benefits for crypto development uncertain.
Conclusion
Overall, "Black Monday" reflected worries over U.S. economic recession dragging down markets, compounded by industry giants' pessimism and global geopolitical turmoil. Short-term, these factors will keep markets in a policy volatility period.
Through historical financial cycles, crisis and opportunity often coexist. Economic downturns, market volatility, and investment losses may bring panic but also offer chances for reinvention and innovation. Crises force businesses to improve models and efficiency, fostering more robust future development.
👉 Explore real-time market analysis tools to stay informed on rate cut impacts.
Frequently Asked Questions
How do Fed rate cuts typically affect Bitcoin?
Fed rate cuts often increase market liquidity and reduce borrowing costs, which can boost risk assets like Bitcoin. However, effects vary based on economic conditions; sometimes cuts signal underlying weakness, leading to volatility.
What is the difference between preventive and relief rate cuts?
Preventive cuts are preemptive, modest adjustments to avoid downturns, while relief cuts are aggressive responses to severe crises, involving deeper and sustained reductions.
Can rate cuts cause inflation that hurts cryptocurrencies?
Yes, rate cuts may stimulate inflation, which could prompt central banks to raise rates later, potentially pressuring crypto markets. Inflation also erodes purchasing power, affecting investment flows.
How should investors approach crypto during rate cut cycles?
Investors should monitor economic indicators, diversify portfolios, and avoid overexposure. Short-term rallies may occur, but long-term trends require broader analysis of regulations and macro conditions.
Do rate cuts always lead to stock market rallies?
Not always. While cuts often support markets, they can sometimes reflect economic troubles that outweigh benefits, as seen in 2008 when cuts failed to prevent prolonged declines.
What role do U.S. elections play in crypto during rate cuts?
Elections introduce policy uncertainty. New administrations may alter crypto regulations, impacting market sentiment independently of monetary policy, making combined analysis essential.