50 BPS Rate Cut Could Spook The Market

After it had started hiking interest rates back in March 2022 to contain rampant inflation due to COVID-related supply chain bottlenecks and money printing

The US Federal Reserve (Fed) is preparing to begin cutting interest rates to stimulate the economy. However, 10x Research warns that a 50 basis points (bps) rate cut could raise concerns for risk-on assets like Bitcoin (BTC).

After raising interest rates in March 2022 to combat high inflation caused by COVID-related supply chain disruptions and monetary easing, the Fed is now set to begin cutting rates. But 10x Research suggests that initiating a 50 bps rate cut could raise alarms for risk-on assets.

Data released on September 6, 2024, by the Bureau of Labor Statistics showed that while unemployment fell slightly, the US economy added fewer jobs than expected. This paves the way for the Fed to begin cutting interest rates, as the central bank is unlikely to want high interest rates to cause undue harm to businesses.

As 10x Research notes, a 50 bps rate cut on September 18, 2024, could signal a lack of confidence in the economy. It could also, albeit unintentionally, suggest that the Fed believes it is too late to avert a looming economic downturn, prompting investors to shift away from risky assets like stocks and cryptocurrencies.

For those unfamiliar with the term, one basis point is equal to 1/100th of a percentage point. Typically, central banks around the world increase or decrease interest rates by 25 bps or multiples, depending on the urgency. Notably, in 2022, there were several instances where the Fed hiked interest rates by 50 or even 75 bps to contain soaring inflation.

In a note shared with clients on Monday, Markus Thielen, founder of 10x Research, stated:

While a 50 basis point cut by the Fed could signal deeper concerns to the markets, the Fed’s primary focus will be mitigating economic risks rather than managing market reactions.

He added:

The probability of a 50 basis point cut is only 29%, contrasting our view and the prevailing consensus. The chorus is growing louder that the Fed is behind the curve, having missed signs of labor market weakness after being caught off guard in July.

Crucial For The Fed To Walk The Thin Line

In a post on X, macro trader Craig Shapiro shared a similar view to 10x Research, saying that despite the market pressuring the Fed to “go bigger and faster” with rate cuts, it should not begin with a 50 bps cut.

According to Shapiro, the markets are essentially “addicted to liquidity,” and in its absence, the market “pivots, sells off and finds the lower put strike level” that forces the Fed to accelerate rate cuts and provide more liquidity. Shapiro argues that we will continue to see declines in the value of risk assets until the Fed capitulates and gives the market what it wants.

Meanwhile, other analysts believe that Bitcoin could begin another rally around early October 2024. At press time, BTC is trading at $55,296, with a total market cap of over $1.09 trillion, as per CoinGecko.