Fed’s Rate Decision to Set the Tone for Stocks, Gold and Crypto

13 сент.

Officials at the central bank are staying tight-lipped over the magnitude of the interest rate cut. What we know so far: there will be one. What we don’t know: is it going to be 25bps or 50bps?

Federal Reserve Chairman Jay Powell (or JPow if you’re a cool kid) is most likely having a hard time sleeping these days. Lurking in the near distance, September 18 to be precise, is a decision he should make that has the power to slosh trillions of dollars across global markets.

Stock valuations, crypto prices and the glow of gold all hinge on a single figure — the US interest rate (USINTR). Major central banks are on the move to unwind their restrictive monetary policies, especially when it comes to global interest rates. Investors have been trying to run ahead of the interest rate decision and position their portfolios to accommodate both a small casual trim to borrowing costs but also a bigger, juicier slash.

Clashing opinions over the size of the interest rate reduction have been swaying the financial markets in recent weeks. Fed officials haven’t sent out any comms regarding that question so markets do what they do best — speculate.

According to the FedWatch tool by CME Group, at the end of this week, investors were nearly even in their expectations for the upcoming interest rate cut with 55% calling for a 25bps (basis points) cut and 45% rooting for the fuller treatment of 50bps.

In any case, this would be the Federal Reserve’s first cut to borrowing costs in more than four years. The benchmark rate in the US is currently sitting at a 23-year high of 5.5% — a level that has stayed flat since July.

After a series of reports pointing to a wobbling economy — and on the back of mostly receding inflation — the central banking clique issued its uplifting guidance at their previous meeting, saying rates are about to go down when they meet again. But what they didn’t say — because they’re data dependent — is how much.

A 25bps cut to interest rates would most likely be already priced in across the spectrum. Stocks, the US dollar, gold and even cryptocurrency are now acting as if this level of rate cut is factored in. Moreover, some investors might even be disappointed to see a rate cut of that casual magnitude. Buy the rumor, sell the news, maybe?

A 50bps cut to interest rates could bring some needed fuel for the next leg up in stocks, gold and crypto. And, on the flip side, knock the dollar’s valuation.

Lower interest rates make money more affordable, enticing investors, businesses and consumers to get more cash out of the bank and spend more freely on big-ticket purchases. Obviously, investors shove the cash into various markets. Businesses expand operations and build new products. And consumers, well, they buy the new iPhone 16 and jam what's left in meme stocks?

Perhaps even more importantly, lower interest rates help steer the economy, keeping it on an upward trajectory. Liquidity improves, because there’s more money flowing in the system, and valuations of public and private assets usually increase.

Take gold (XAUUSD), for example. Gold hit an all-time high Friday morning, pumping above $2,570 per ounce. Driving the gains was the relationship between gold and the prospects of lower rates, which make bullion more appealing because they reduce the opportunity cost of holding a non-yielding asset. At the same time, the US dollar loses some of its allure because the reduction in rates triggers a lower yield on dollar deposits.

Bitcoin (BTCUSD) is another interest-ing candidate to join the rate interplay. The OG token has been increasingly correlated to macroeconomic factors and the rate decision is already seen impacting its price in a positive way.

Stocks have been in choppy trading mode over the past couple of months largely due to the looming uncertainty about the looming rate-setting meeting.

So what do you think it’s going to be — 25bps or 50bps? And how would it affect financial markets? Shoot your thoughts below!