US Fed Interest Rate Cut Might Trigger ‘Sell-the-news’ Event

After steady economic growth as showcased by economic data, the Federal Reserve now have the basis to cut interest rate

Key Notes

The Federal Reserve may cut interest rates later this month.Experts are divided on how much rate cut to expect.If implemented, the cut may impact Bitcoin and risk assets positively.

There are expectations that the United States Federal Reserve will implement a 25-basis-point rate cut next Wednesday. This proposed rate will come as the next Federal Open Market Committee (FOMC) meeting is slated to go live on September 18. At the same time, prominent economist Steve Hanke believes that it could trigger a “sell-the-news” event for risk assets like Bitcoin (BTC).

“A 25-basis-point cut is already anticipated by the market, which means the actual cut might underwhelm, triggering a sell-the-news response,” The Johns Hopkins University economist noted. “In contrast, a 50-basis-point cut is not factored in. If it were to materialize it would probably give the market a lift.”

25-Basis-Point or 50-Basis-Point Interest Rate Reduction?

According to the CME FedWatch tool, interest rate traders are pricing in a 57% probability of a 25 bps cut and a 43% chance of a 50 bps reduction. Notably, the odds for the 50 bps cut only recently went from 13% to 43%. At this level, Hanke is positive that Bitcoin and other risk assets would experience intense volatility in the coming months leading up to the US elections.

The economist highlighted fixed-income investments, such as the 10-year US Treasury bond and gold, as a shield for this potential situation. In his opinion, these traditional assets are a preferred investment alternative when heightened volatility hits the market. Leena ElDeeb, a profound analyst at 21Shares Research, also weighed in on the interest rate cut.

The independent journalist thinks a market move could be triggered should the Federal Reserve choose a 50 bps cut. She did not fail to acknowledge that it could also lead to investor caution. To put this in perspective, a 50-basis-point cut could give the impression that the Fed is responding to recessionary warning signs.

“A more aggressive rate cut could shock the markets, given that it would ring alarm bells for a recession. Investors would trade cautiously to weather market conditions, which could hurt risk-on assets in the short term,” ElDeeb wrote in an email.

More Entities Tilt Towards a 50-Basis-Point

A few entities, including former New York Federal Reserve President Bill Dudley, are backing the 50 bps cut proposal. While speaking at the Bretton Woods Committee’s annual Future of Finance Forum in Singapore, he noted a strong case for whether the Federal Reserve will do it or not.

Dudley clarified that the current interest rate is 150-200 basis points above what is stated as the neutral rate for the US economy. At this so-called neutral rate, monetary policy is neither restrictive nor accommodative. “So the question is: ‘Why not just get started?’”

Meanwhile, Bitcoin is currently trading at $57,872.34, up 0.17% in the last 24 hours. In the case of a rate cut, BTC and other inflation hedges will likely soar. This is because rate cuts have the tendency to devalue the US Dollar, which will strengthen the hedge appeal of BTC.

Disclaimer: Coinspeaker is committed to providing unbiased and transparent reporting. This article aims to deliver accurate and timely information but should not be taken as financial or investment advice. Since market conditions can change rapidly, we encourage you to verify information on your own and consult with a professional before making any decisions based on this content.

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