The Federal Open Market Committee (FOMC) recently lowered the U.S. benchmark interest rate by 0.25%, from 5% to 4.75%. This cut is part of the Fed’s strategy to stabilise the economy as inflation eases toward the 2% target while labour markets show signs of loosening. With this move, the Fed has sparked optimism for a potential economic recovery, positively influencing risk assets like stocks and cryptocurrencies.
The FOMC’s recent statement reflects its commitment to maintaining a careful balance between employment and inflation. Economic activity in the U.S. has been expanding steadily, yet the Committee notes that labour market conditions have softened slightly since earlier this year.
Unemployment has crept up but remains historically low, while inflation has made strides toward the 2% goal, which is still above target. FOMC’s main mission remains clear: maximise employment and bring inflation down to 2% in the long run.
FOMC’s Approach to Economic Risks and Rate Cuts
In pursuit of these goals, the FOMC reduced the federal funds rate to a target range of 4.5% to 4.75%. Looking forward, any further adjustments will be made with caution, based on the latest data and evolving risks. The Committee also highlighted that it will continue gradually reducing its holdings of Treasury securities, agency debt, and mortgage-backed securities to keep financial markets stable and in check.
Source: Trading Economics
The FOMC is ready to adjust its monetary policy stance if new risks emerge that could impact its employment and inflation goals. In making these assessments, the Committee will consider a wide array of factors, from labour market dynamics and inflation pressures to international economic developments. This flexible approach enables the FOMC to respond effectively to ongoing economic changes.
Jerome Powell’s Cautious Optimism
Federal Reserve Chair Jerome Powell, speaking after the FOMC decision, reaffirmed that while the rate cut provides relief, the Fed remains open to potential future rate hikes if the situation calls for it. Powell remarked that it’s still too early to predict with certainty whether the Fed will need to raise rates next year. “I wouldn’t rule that out,” he explained, “though it’s certainly not our plan at this time.”
Powell also highlighted the challenges still facing inflation. The core inflation rate, which excludes food and energy, currently stands at 2.7% year-over-year. This progress toward the Fed’s 2% target is encouraging but still short of complete success.
Citing high levels of uncertainty, Powell suggested that this isn’t the moment to provide extensive forward guidance. The Fed is choosing to hold back on forecasts, acknowledging considerable uncertainties both domestically and globally, which could impact its trajectory.
Impacts of the Rate Cut on Stocks and Crypto
This latest rate cut has lifted sentiment across risk assets, notably stocks and cryptocurrencies. As borrowing costs decrease with lower interest rates, liquidity in the economy tends to rise. This increase in money supply is expected to weaken the U.S. dollar’s value, a development often correlated with gains in risk assets like Bitcoin and the stock market.
Bitcoin, in particular, has reacted strongly to this move, recently reaching an all-time high of $76,872.61 just hours before this article’s publication on 7 November 2024. This surge suggests that investors view the Fed’s policy shift as a positive signal.
However, it’s worth noting that some large investors or “whales” have been selling, possibly waiting for a pullback before buying back in. This pattern hints at the potential for a price correction, even if Bitcoin’s upward trend might continue long term.
Caution Amid Optimism: The Importance of Risk Management
While the Fed’s recent rate cut has energised the markets, particularly for those eyeing a rebound, investors need to exercise caution. Effective risk management is paramount in an environment that’s still highly volatile. Avoiding FOMO (Fear of Missing Out) and sticking to a well-thought-out investment strategy can make a significant difference, especially in unpredictable markets like crypto.
Though Bitcoin’s latest rally has brought renewed enthusiasm, high volatility always comes with risk. Investors are advised to base their decisions on solid data and to understand the inherent risks fully. In this phase of global economic uncertainty, diligent risk management is crucial for safeguarding investments, whether in stocks or cryptocurrencies, as markets continue to shift.
