• The Federal Reserve cut interest rates for the first time in four years by 50 basis points, signaling the start of its easing campaign.
• Bitcoin’s price decreased by 17% over the past day, falling to $60,000 ahead of the rate-cut decision, while Ethereum and Solana also declined.
• The Fed’s decision accentuated a shift in its fight against inflation, with the focus now moving toward supporting a cooling US labor market.
The Federal Reserve lowered its benchmark interest rate by 50 basis points Wednesday, kicking off its long-anticipated easing cycle with a sizable first step. The move marks the central bank’s first rate cut in four years.
FOMC Decision
The Federal Open Market Committee (FOMC) decided to lower the federal funds rate to a target range of 4.75% to 5%, down from 5.25% to 5.5%.
Minutes before the decision, traders foresaw a 61% chance of a supersized cut, according to the CME Group.
The FOMC said in a statement, “Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point,” the statement continued.
Market Reaction
Meanwhile, Bitcoin’s price has decreased 1.7% over the past day, falling to $60,000 as of this writing. The asset’s price dipped ahead of Wednesday’s rate-cut decision, along with Ethereum and Solana, which were down 2.6% to $2,300 and 3.1% to $129 respectively.
Rationale and Projections
Alongside Wednesday’s reduction in rates, Fed officials published a Summary of Economic Projections. Within that release, a so-called dot plot indicated that policymakers believe the federal funds rate will settle close to around 4.5% by year’s end.
Projections released in June pointed to a less pronounced drop in rates by the end of 2024, showing a median forecast of around 5%. Additionally, officials foresaw the federal funds rate falling to around 4% by the end of 2025, and those projections were lowered to 3.25% as well.
Shift in Fed Policy
Wednesday’s rate cut accentuated a shift in the Fed’s fight against inflation, which peaked at a four-decade high of 9.1% in 2022. As the pace of inflation has slowed in recent months—a readout last week showed inflation ran 2.5% in the 12 months through August—the Fed’s focus has moved toward supporting a cooling U.S. labor market.
“The time has come for policy to adjust,” Fed Chair Powell said a month ago, adding that the U.S. central bank does “not not seek or welcome further cooling in labor market conditions.”
Conclusion
The Fed’s decision Wednesday was marked by uncertainty. Following the inflation readout last week, expectations solidified around a 25-basis-point rate cut. Yet traders’ expectations of a 50-basis-point rate cut strengthened following articles published in the Wall Street Journal and Financial Times that suggested Wednesday’s meeting would be a close call.
As markets recalibrated, spot Bitcoin ETFs saw inflows surge, indicating that Bitcoin is establishing itself as a go-to tool for investors looking to go risk-on, according to Matt Hougan, Chief Investment Officer of Bitwise.
