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How US Rate Cuts Impact Crypto and Stocks and What To Expect?

Published September 17, 2024 12:56 PM
Giuseppe Ciccomascolo
Published September 17, 2024 12:56 PM
Key Takeaways
  • While rate cuts are often seen as bullish, their impact depends on economic conditions, market expectations, and inflation concerns.
  • During economic downturns, rate cuts may not be enough to offset broader market fears.
  • U.S. markets have reacted differently to rate cuts over time.
  • Crypto’s reaction to rate cuts depends on broader economic conditions.

The notion that lower interest rates automatically translate to higher equity prices is a widely held assumption on Wall Street.

Yet, reality often defies expectations. While cheaper borrowing costs can indeed stoke economic growth, rate cuts can also serve as a cautionary flag, signaling that the economy may be losing momentum—rattling investor confidence in the process.

The ripple effects of the Fed’s decision-making, however, don’t stop at traditional markets. Crypto markets, too, have exhibited a curious and often counterintuitive response to U.S. monetary policy shifts, raising questions about its maturation and its increasingly complex relations with mainstream finance.

Stocks Reaction To Rate Cuts

When the Federal Reserve cuts rates, it’s typically in response to economic distress, such as slowing growth, rising unemployment, or market instability.

At first glance, lower rates seem like a surefire way to stimulate economic activity, but investors often focus on the underlying concerns that prompted the rate cut rather than the rate cut itself.

These concerns, such as recession fears, financial crises, or geopolitical risks, can lead to market sell-offs as investors reduce exposure to uncertainty.

This nuanced reaction is rooted in the understanding that rate cuts alone can’t guarantee a reversal of economic fortunes. In fact, history has shown that during major crises, rate cuts often fail to calm investor fears.

The 2008 financial collapse and the COVID-19 pandemic are two such examples where rate cuts were insufficient to address the deeper systemic risks at play.

Moreover, late in an economic cycle, rate cuts can be seen as too little or too late, especially when growth is slowing. In such cases, the market may view rate cuts as inadequate to prevent a recession.

Additionally, if rate cuts are fully anticipated, markets may have already priced them in, leading to muted or even negative reactions, a phenomenon known as “buy the rumor, sell the news.”

Reaction In Details

A historical analysis of U.S. stock market reactions to Fed rate cuts since 2001 illustrates this complexity. In the aftermath of the dot-com bubble burst, the Fed’s aggressive rate cuts led to mixed responses, with some cuts prompting sharp rallies and others resulting in steep declines.

Similarly, during the 2007-2008 financial crisis, initial rate cuts briefly lifted the market, but as the crisis worsened, volatility persisted, and investors lost confidence in the Fed’s ability to stabilize the economy.

More recently, the Fed’s emergency rate cuts in response to the COVID-19 pandemic in 2020 triggered sharp sell-offs rather than relief.

The market dropped 12% following a key rate cut in March 2020, highlighting the limits of monetary policy during unprecedented events. These examples underscore the complex relationship between rate cuts and stock market reactions, revealing that the reality is far more nuanced than the conventional wisdom would suggest.

Date of Rate Cut Cut New Fed Funds Rate S&P 500 Reaction (Day) Market Context
Jan. 3, 2001 50 bps 6.00% +5.0% Dot-com bubble bursting, recession fears.
Jan. 31, 2001 50 bps 5.50% +1.5% Continued weakness in the tech sector.
March 20, 2001 50 bps 5.00% -1.9% Growing concerns over a slowing economy.
April 18, 2001 50 bps 4.50% +3.9% Surprise cut to counter tech bust.
May 15, 2001 50 bps 4.00% +0.9% Persistent slowdown, recession worries.
June 27, 2001 25 bps 3.75% +0.2% The market was still weak post-dot-com bubble.
Aug. 21, 2001 25 bps 3.50% +0.5% Pre-9/11 economic jitters.
Sept. 17, 2001 50 bps 3.00% -4.9% Post-9/11 terrorist attacks, severe market drop.
Oct. 2, 2001 50 bps 2.50% -1.6% The economy trying to stabilize post-9/11.
Nov. 6, 2001 50 bps 2.00% -0.4% Further economic weakening.
Dec. 11, 2001 25 bps 1.75% -0.8% Year-end uncertainty, weak growth.
Nov. 6, 2002 50 bps 1.25% +2.6% Stimulus after corporate scandals.
Sept. 18, 2007 50 bps 4.75% +2.9% Start of cuts during the subprime mortgage crisis.
Oct. 31, 2007 25 bps 4.50% +1.2% Early warning signs of financial instability.
Dec. 11, 2007 25 bps 4.25% -2.5% Weakness in financial markets.
Jan. 22, 2008 75 bps 3.50% +5.5% Emergency cut in response to financial crisis fears.
Jan. 30, 2008 50 bps 3.00% +1.1% Ongoing response to subprime crisis.
March 18, 2008 75 bps 2.25% +4.2% Bear Stearns collapse and liquidity concerns.
April 30, 2008 25 bps 2.00% +1.7% Markets remain highly volatile.
Oct. 8, 2008 50 bps 1.50% -1.1% Global financial crisis deepens.
Oct. 29, 2008 50 bps 1.00% +4.1% Post-Lehman Brothers collapse, extreme volatility.
Dec. 16, 2008 75 bps 0.25% +5.1% Rates cut to near-zero, major financial crisis.
July 31, 2019 25 bps 2.25% -1.1% Preemptive cut amid trade war and global slowdown fears.
Sept. 18, 2019 25 bps 2.00% -0.3% Continuing global economic slowdown concerns.
Oct. 30, 2019 25 bps 1.75% +0.3% Trade tensions easing, but weak global growth.
March 3, 2020 50 bps 1.25% -2.8% Emergency cut due to COVID-19 pandemic fears.
March 15, 2020 100 bps 0.00% – 0.25% -12.0% Emergency cut amid COVID-19 lockdowns, severe economic collapse fears.

Crypto Recent History

Crypto markets, on the other hand, have shown mixed reactions to Federal Reserve rate cuts between 2001 and 2024.

In the early years, crypto was largely unaffected by interest rates, as Bitcoin only emerged in 2009 and was driven by factors like technological adoption.

However, as the market matured, particularly after 2017, crypto began to respond more to macroeconomic events, including Fed rate cuts.

During the 2019 rate cuts, crypto assets rallied as investors sought speculative opportunities, drawn to the potential for high returns in the relatively new and untested market.

However, the COVID-19 pandemic in 2020 brought a dramatic shift in this trend. Initially, emergency rate cuts sparked a sharp sell-off in crypto as investors fled to safer assets amidst the uncertainty.

But as the dust settled, the abundance of liquidity and near-zero interest rates created a perfect storm that fueled a massive rally in crypto assets. Bitcoin, in particular, surged to new highs as investors and traders flocked to the asset class, seeking refuge from the economic turmoil.

In recent years, from 2022 to 2024, the crypto market’s sensitivity to monetary policy has increased dramatically.

As the Fed jumped between hiking and cutting rates, crypto markets began to react more pronouncedly to these shifts.

Year Fed Rate Decision Bitcoin Market Reaction
2010–2015 Zero interest rate policy (ZIRP) Bitcoin was relatively unaffected by Fed decisions. Instead, it was driven by early adoption and development.
2016 Gradual rate hikes Minimal immediate impact on Bitcoin; still largely driven by tech and niche adoption.
2017 Continued rate hikes Bitcoin surged due to increasing adoption and speculation, largely decoupled from Fed moves.
2018 Aggressive rate hikes Bitcoin saw a bear market, mainly driven by the bursting of the 2017 crypto bubble, not Fed policy.
2019 Preemptive rate cuts Bitcoin rallied along with other risk assets, benefitting from increased liquidity.
2020 Emergency rate cuts (COVID-19) Initial sharp sell-off in Bitcoin, followed by a massive rally as liquidity surged.
2021 Low rates and stimulus continue Bitcoin hit all-time highs, driven by excess liquidity, institutional adoption, and inflation concerns.
2022 Rapid rate hikes to combat inflation Bitcoin experienced a sharp sell-off, reflecting its growing correlation with risk assets like tech stocks.
2023 Continued rate hikes, speculation on cuts Bitcoin remained volatile; briefly rallying during speculation about a potential Fed pivot.
2024 (anticipated) Potential rate cuts as inflation cools Bitcoin’s reaction will likely depend on broader economic conditions and investor sentiment toward risk assets.

What Do Experts Say?

The U.S. central bank is widely expected to cut its rates by 25 basis points on Wednesday, Sept. 18, 2024. Financial markets, however, may prove to be somewhat disappointed by the lack of concrete policy guidance.

Michael Brown, Senior Research Strategist at Pepperstone, said: “This is especially true when considering the aggressively dovish rate path that is currently discounted by the USD OIS curve, which prices over 100bp of cuts this year, and a total of 235 bp of cuts by July 2025.”

“Markets, for now at least, appear to be in the ‘hurry up and get on with it’ camp, given the aggressive pace of easing that the curve currently implies,” he added.

BCA Research  analysts explained: “Investors are navigating a precarious landscape as the Federal Reserve’s anticipated interest rate cuts may not provide the boost to risk assets that many are hoping for. Fed’s easing cycle is shaping up to be a classic “buy the rumor, sell the news” scenario.”

“As in 2001, a U.S. economy flirting with recession will cause corporate profits to contract materially and share prices to decline. Investors should stay put on global risk assets, and asset allocators should favor bonds over stocks.

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