Rates cut

Recently, the FOMC decided to cut interest rates by 50 bps. A 50bps rate cut is no small move—it signals that the central bank wants to stimulate economic activity by making borrowing cheaper and encouraging spending. With lower interest rates, everything from loans to mortgages becomes more affordable, giving the economy a much-needed boost. While a rate cut might seem like just another economic lever, its effects on various asset classes are anything but simple. Each market reacts differently, and the ripples of a rate cut can be felt months after the decision. Let’s explore how this plays out in different markets.

Crypto

Crypto tends to perform well in "risk-on" environments, where liquidity is ample, and investors are willing to take on more risk. Several studies have shown a correlation between loose monetary policy and increased speculative investments, including in crypto assets. While historical data on crypto and FOMC cuts is still developing, research on liquidity-driven asset booms supports the view that crypto benefits from increased liquidity and lower borrowing costs. 

Typically, after a rate cut, you’ll see an initial rise in crypto, as we’re currently experiencing. However, crypto is still highly volatile. If inflation expectations or other economic data (unemployment, payrolls, etc.) indicate that the economy is overheating, the market will fear that FOMC rate hikes might come. That will lead to significant price corrections in crypto. So, it’s always prudent to watch how the economy evolves and stay nimble in your positioning.

Stocks

Like crypto, you’ll see similar behavior after rate cuts. Lower interest rates reduce the cost of corporate debt, making it easier for companies to borrow for expansion or to finance share buybacks. As we’ve seen, the rate cuts boosted stock prices. However, historically, we’ve seen that the beginning of rate cuts has led to significant stock market pullbacks. However, in some cases, these rate cuts were emergency cuts where it was already known that the economy was deteriorating. The recent 50bps cut signals a proactive effort to support the economy amid some potential risks, so it may be different this time.

USD: A Gradual Slide

Interest rates and currency values are deeply intertwined. When the FOMC cuts rates, the USD often weakens, as lower yields make the currency less attractive to foreign investors. Initially, the dollar may depreciate in the months following the cut. As investors look for higher yields elsewhere, they move capital into other currencies or asset classes, reducing demand for the dollar.

Hopefully, this will help you understand how various asset classes behave when the Fed cuts interest rates.

Next week, we’ll investigate how other assets behave when the Fed cuts interest rates. Stay tuned!