Is the Fed signaling a market crash? Why the 50 bps rate cut feels like 2007 all over again

Why did the Fed cut interest rates by 50 basis points, the most since 2020? What hidden dangers are they trying to prevent, and could this backfire on the economy?

The Fed dropped a “bomb”

The US Federal Reserve (Fed) made a notable move in the financial world on September 18, lowering interest rates by 50 basis points. This was the first reduction since the start of the pandemic in March 2020.

That adjustment brought the rate down to a range of 4.75% to 5%, a larger drop than many analysts had expected. For context, the rate had previously been hovering between 5.25% and 5.50%, at a 23-year high.

The Fed’s decision comes on the heels of some positive news on the inflation front. In August, U.S. consumer price inflation fell to its lowest point since February 2021, settling at 2.5% — slightly below the forecast 2.6%.

However, core inflation, which excludes food and energy prices, rose by 0.3%, suggesting that underlying pressures remain present. At the same time, job gains have slowed and the unemployment rate, while rising slowly, remains relatively low.

The Federal Open Market Committee reiterated its commitment to reducing inflation to 2% in a press release, signaling a possible shift toward a prolonged easing period. This comes especially in light of the fact that US inflation has skyrocketed to 9.1% in June 2022 under the Biden-Harris administration.

The question now is: What does this mean for the crypto market? Will this relaxation inject liquidity into the market and push crypto prices higher, or will uncertainty keep investors cautious?

Stocks and cryptocurrencies in green

After the unexpected rate cut by the Fed, the stock market initially experienced mixed sentiment. On September 18, the massive 50 basis point cut was applauded by investors with major indices such as the Dow Jones and S&P 500 trading in the green.

However, optimism faded by the end of that trading session. Stocks ended in the red, signaling growing concerns that the Fed may be moving to brace for possible economic weakness.

On September 18, the Dow Jones Industrial Average fell 103 points, or 0.25%, to close at 41,503. It had gained more than 375 points before pulling back earlier in the session. The S&P 500 fell 0.29% to close at 5,618, while the Nasdaq Composite fell 0.31% to 17,573.30.

However, as of September 19, markets welcomed the rate cut with open arms. At the time of writing, the trading session was still ongoing and the indices were up significantly.

BREAKING NEWS: Stock futures rose to new record highs as investors reacted to the Fed’s first rate cut since March 2020.

This year alone, the S&P 500 and Nasdaq have increased in value by more than 20 percent.

The S&P 500 has added $3 TRILLION to its market cap since September 6th.

It’s truly extraordinary. picture.twitter.com/pIGZHsCFAg

— Kobeissi Letter (@KobeissiLetter) September 19, 2024

The Nasdaq rose 476 points, gaining more than 2.7 percent, to 18,050. The S&P 500 rose 93 points, gaining more than 1.66 percent, to 5,711.

Meanwhile, the crypto market has also been on the rise, with total market value increasing by nearly 6.5% in the last 24 hours, reaching $2.18 trillion.

This marks a sharp reversal from previous concerns. On September 18, Bitcoin (BTC) broke through the $62,000 resistance level, which it had not been able to break since late August. At the time, BTC was trading around $64,000 before falling to as low as $54,000 by September 9.

Now, BTC is gaining momentum with a strong upward move, gaining over 6.5% in the last 24 hours and trading at $63,500 at press time. Ethereum (ETH) is also currently climbing over 6% to $2,430.

BTC 6-month price chart | Source: TradingView

Altcoins in the top 100 are making significant gains, with increases ranging from 15 to 30 percent, making this one of the biggest single-day jumps in recent weeks.

Growing concerns surrounding financial markets

The Fed’s recent 50 basis point rate cut has raised serious concerns in the financial community. One perspective came from The Kobeissi Letter, a respected financial newsletter that drew alarming parallels between this rate cut and past ones.

Under the X heading, it was noted that the Fed had started its interest rate reduction cycle with such a large reduction for the third time in recent history, and that this move should attract attention.

It’s official now.

The Fed started the interest rate cut process with a 50 basis point cut.

This is only the THIRD time in recent history that the Fed has begun cutting rates by 50 basis points.

The previous two times the economy collapsed.

Is it different this time?

(a topic)

— Kobeissi Letter (@KobeissiLetter) September 18, 2024

According to The Kobeissi Letter, the last two years the Fed cut interest rates this aggressively were 2001 and 2007. In both cases, the economy not only floundered, it collapsed.

“When the Fed cut interest rates by 50 basis points in 2001, Nasdaq returns totaled -76% from top to bottom over a 3-year period.”

More simply, tech stocks tumbled and experienced one of the worst bear markets in history.

Things didn’t go so well in 2007, when the Fed’s rate cuts coincided with the global financial crisis. The Nasdaq again fell a staggering 56% from its peak, causing widespread devastation in the tech sector and beyond.

Now, fast forward to 2024. We are in a very different world—tech stocks are at all-time highs and the Nasdaq is up. Still, the Kobeissi Letter poses a critical question: “Clearly, 2024 is very different from 2001 and 2007, so why is the Fed cutting interest rates so aggressively?”

Their concern is that history has not been kind when the Fed begins a rate-cutting cycle with such a big cut. In both previous examples, those moves were followed by deep recessions, market crashes and widespread economic collapses.

So what about 2024? On the surface, the economy looks relatively strong. Job gains may have slowed and unemployment may have risen slightly, but it’s still at historically low levels. Inflation is also easing—it fell to 2.5% in August, the lowest level since February 2021.

But there may be more lurking beneath the surface. The Fed’s aggressive rate cuts could indicate they see risks that the broader market hasn’t yet fully acknowledged.

Perhaps they are bracing for a slowdown in economic growth or trying to cushion the blow of increasingly high debt levels, which have been compounded by the rapid rise in borrowing costs during the recent tightening.

It is also worth noting that the stock market reacted with mixed signals. Initially, investors welcomed the rate cut and sent the Dow and S&P 500 to new highs. But by the end of the day, reality set in and both indexes closed lower. The next few months will be critical in determining whether we are in for a rough ride or if this time will really break the cycle.