How Do Fed Rate Cuts Affect Bitcoin and Stocks?

TL;DR

A 25-basis-point rate cut is presented as the expected FOMC decision, lowering the federal funds rate from 4.25% to 4%, while policy would remain theoretically restrictive. Such risk-management cuts can support Bitcoin and stocks when labor conditions remain stable, but cuts made in response to rapidly rising unemployment have historically coincided with market declines.

Transcript

Hey everyone and thanks for jumping back into the macroverse. Today we're going to talk about the upcoming FOMC meeting that's of course occurring on October 29th. And we'll of course discuss the implications for risk assets such as as Bitcoin and and other financial markets. If you guys like the content, make sure you subscribe to the channel, giv... Read More

Key Insights

• A 25-basis-point rate cut is treated as the most likely FOMC outcome because markets are already fully expecting it. Such a decision would reduce the federal funds rate from 4.25% to 4%, which the analysis still considers theoretically restrictive for parts of the economy.
• Risk-management rate cuts are proactive measures intended to extend the economic runway rather than reactions to obviously terrible data. The Federal Reserve is cutting without a sudden unemployment surge, although missing labor and inflation reports make current economic conditions harder to evaluate.
• The expected sequence of rate cuts resembles 2024, with cuts in September, October, and potentially December. The stated difference is that the first 2024 cut was 50 basis points, whereas the first cut in the current sequence was only 25 basis points.
• The 2-year Treasury yield is presented as a useful approximation of the direction of monetary policy. With the yield near 3.49%, or roughly 3.5%, it signals that the federal funds rate may need to move lower from its current level.
• Rate cuts are generally constructive for risk assets when labor and inflation conditions remain stable. Markets can still rally before a cut and correct immediately afterward, but a short-term pullback does not necessarily prevent another advance later in the cycle.
• Rapidly rising unemployment changes the meaning of monetary easing because aggressive cuts may then be responses to economic deterioration. During the financial crisis, rate cuts did not prevent falling markets after unemployment began increasing in a nonlinear and increasingly aggressive way.
• Narrow market leadership is not unique to the current cycle because a small group of companies has led gains in many previous business cycles. The Magnificent 7 dominate recent stock-market performance, while Bitcoin has generated most of the gains within the cryptocurrency market.
• Market tops usually develop as processes, while bottoms are described as events that can pass quickly. Elevated valuations therefore do not establish that markets must immediately reverse, particularly when the S&P 500 has continued reaching new all-time highs.

Questions & Answers

Q: What rate decision was expected at the upcoming FOMC meeting?

Markets were described as fully expecting a 25-basis-point interest-rate cut at the upcoming FOMC meeting. The federal funds rate was stated to be 4.25%, so the anticipated decision would lower it to 4%. A failure to cut would therefore take markets by complete surprise because the expected reduction was already treated as the overwhelmingly likely outcome.

Q: Why are the expected Fed cuts called risk-management cuts?

The expected cuts are called risk-management cuts because they are proactive rather than direct responses to obviously terrible economic data. The unemployment rate had not suddenly jumped to 4.5% or 4.6%, for example. The stated purpose is to extend the economic runway and reduce future risks while policy remains restrictive, even though the Federal Reserve lacks some recent labor and inflation information.

Q: How does missing economic data affect the Federal Reserve's decision?

Missing labor and inflation reports leave the Federal Reserve without some of the information it normally uses to make policy decisions. The analysis states that labor-market data had not been released earlier in the month, might also be unavailable in early November, and that inflation data might not arrive the following month because it was not being collected during the current month.

Q: How does the 2-year yield signal future Federal Reserve policy?

The 2-year Treasury yield is presented as a close approximation of where monetary policy may be heading, although it is not claimed to be the neutral rate itself. Historically, the federal funds rate tends to follow the 2-year yield. With that yield at 3.49%, approximately 3.5%, it suggests that the Federal Reserve should lower rates from their current level.

Q: When can rate cuts support Bitcoin and stock markets?

Rate cuts can support Bitcoin, stocks, and other risk assets when economic data are holding up and the cuts are designed to manage risks before a serious downturn develops. The S&P 500 had risen considerably since the previous September cut. Markets may still experience short-term corrections after rallying into a decision, but another advance can follow if underlying conditions remain stable.

Q: Why can markets fall even after the Federal Reserve cuts rates?

Markets can fall after rate cuts when the Federal Reserve is reacting to severe economic deterioration rather than easing proactively. The financial-crisis example shows cuts occurring near the end of a cycle while unemployment was accelerating sharply. Aggressive easing did not rescue the market once prices were already falling and unemployment was moving upward in a nonlinear, increasingly rapid pattern.

Q: Why can index funds help when market gains are narrowly concentrated?

Index funds can help because identifying the few companies responsible for most gains is difficult early in a cycle. Investors holding an index also own weaker performers, but they automatically receive exposure to the leading companies that can lift the broader asset class. The analysis compares the Magnificent 7's leadership in stocks with Bitcoin's dominant contribution to cryptocurrency-market gains.

Q: Do elevated valuations mean the market is about to peak?

Elevated valuations do not necessarily mean an immediate market peak. The analysis acknowledges that valuations are somewhat elevated, although not as elevated relative to earnings as they were in 2000. The practical question is whether valuations can become even more stretched in the short term. Historical topping patterns can last more than a year, while bottoms may occur much faster.

Summary & Key Takeaways

• Markets are described as fully expecting the Federal Reserve to cut rates by 25 basis points, bringing the federal funds rate from 4.25% to 4%. The cut is characterized as proactive risk management because officials lack recent labor and inflation data showing an obvious economic emergency that demands an immediate response.

• The 2-year Treasury yield, at approximately 3.5%, is presented as a practical approximation for where monetary policy may be heading. Historically, the federal funds rate tends to follow the 2-year yield, so its position below the current policy rate suggests that further cuts, potentially including another cut in December, remain plausible.

• Rate cuts can support risk assets when economic data remain stable, although markets may still correct after initially rallying into an FOMC decision. The crucial distinction is whether cuts are proactive or responses to sharply rising unemployment. Elevated valuations alone do not establish an immediate top because market tops often develop over extended periods.