Well, what a difference a couple of weeks can make in markets.
There's no question that the 'jumbo' rate cut by the Fed caught a fair number of people off guard, and it has sparked a furor of speculation as to what exactly factored into the final decision to cut 50bps rather than 25bps.
In last month's post, we highlighted a number of indicators pointing to alarm bells for the US economy, so the bigger-than-expected cut points to the Fed's increasing desperation to outmaneuver a full-blown recession. Mainstream narratives will have you believe that the market's enthusiasm reflects a renewed "Fed Put" – the notion that Powell and co. are ready to backstop growth at all costs. However, it's increasingly obvious that the 50bps cut wasn't really a “dovish” move but rather an acknowledgment of deeper problems. Inflation is returning to target, yes, but labor market conditions are faltering—something the Powell Fed won’t tolerate.
At the same time, we have to assume that fiscal dominance (i.e. servicing the $35.3 trillion federal debt) played a significant role in the large cut, even to the point of potentially jeopardising progress made on the CPI.
The Fed appears to have well and truly painted itself into a corner. But how did the markets digest the news?
Stocks
Despite the Fed's cut being anticipated for months, it was the magnitude of the cut, the first since March 2020, sent a ripple of optimism through the financial markets. Despite the modest initial uptick The S&P 500 has since hit record-breaking highs where it currently sits at 5730 points.
Broad index performances were largely boosted by big gains from the heavy hitters, with Tesla surging over 7%, and Apple and Meta Platforms, each up almost 4% immediately on the news and have since continued to trend higher.
While the stock market rally has initially been positive, broader skepticism around the economy could dampen the follow-through. Investors are pricing in the reality that while liquidity may flow, it may not be enough to combat the risks on the horizon, especially with the unemployment rate forecasted to rise over the next year. Additionally, equity markets are facing increased volatility as the Fed hints at future rate cuts, adding uncertainty to already jittery investors who are wary of liquidity concerns and long-term market resilience.
Gold
Gold has been in a sharp upward trend since June and has put in multiple all-time highs in USD terms since then. Gold's positive reaction to the cut wasn’t just a simple reaction to lower rates, it reflects deeper concerns about the Fed’s ability to navigate a soft landing for the economy. Indeed, these concerns have not abated since the beginning of the year which has played a significant role in gold's 28.2% performance YTD.
Lower interest rates typically weaken the dollar, enhancing gold’s appeal as a hedge against currency devaluation and long-term inflation fears. Again, the larger-than-expected cut suggests that the Fed is looking at potential cracks in the economic foundation, and gold’s rally likely reflects a growing fear that inflation may not be as under control as Powell would like us to believe. Couple that with ongoing geopolitical tensions and renewed demand from central banks, and you’ve got a recipe for sustained interest in the yellow metal.
Historically, even though gold has behaved as expected (high inflation, lower real interest rates) there are periods where it does the opposite. But there are currently too many macro and geopolitical factors in play to keep the lid on it (central bank demand, sticky core inflation, spiraling federal debt) and these conditions are reflected in gold's current trajectory: up and to the right.
Bitcoin
Following the announcement of the rate cut, bitcoin experienced a significant price surge, climbing some 2.4% on the day and followed through with a strong 10% move up to 66,508 on Sept 27. Lower rates reduces the opportunity cost of holding non-yielding assets like bitcoin, making it more attractive as a speculative investment.
Despite this, bitcoin's price dropped to $63,000 at the start of this week, even after Fed Chair Powell hinted at further rate cuts. This suggests that the premier digital asset will need additional bullish impetus to clear resistance en route to hitting new all-time highs. This most recent move down once again means that bitcoin has been unable to break out of the expanding megaphone pattern it has remained locked in since its most recent all-time high back in March 2024.
Bitcoin’s struggle to maintain its bullish trajectory can be attributed to this deteriorating global environment—weak economic growth, geopolitical unrest, and growing fears that central banks may soon face limits on cutting interest rates.
The escalating tensions in the Middle East, particularly following the recent attacks in Lebanon, are adding another layer of risk to the global economic landscape. Israeli Prime Minister, Benjamin Netanyahu, has warned that current measures may fall short, implying further action could be on the horizon. A sharp rise in oil prices would likely push inflation higher, constraining Fed's ability to continue easing monetary policy.
While these pressures will drive demand for bitcoin as a long-term hedge, the current environment is defined by uncertainty and could lead to traders pulling back from riskier assets in the short-term.
On the positive side, despite these headwinds bitcoin is still poised for a positive Q4 where it has historically posted its largest gains. This Fed cut neatly coincides with the bottoming out and reversal of the global liquidity cycle, something that’s historically been a tailwind for bitcoin. Further, investors are not just piling into bitcoin because of lower rates; they're flocking to it as a hedge against central bank mismanagement, rising debt, and potential currency devaluation. Therefore the latest dip is just coiling the spring for the eventual breakout.
Conclusion
The Fed's surprising 50bps rate cut is a clear signal that it’s willing to take aggressive action in the face of growing economic uncertainties. But while the move has provided short-term support to risk assets, it raises questions about the stability of the broader financial landscape. The cut reflects the Fed’s concerns about deeper structural problems—whether it’s weakening labor markets, persistent inflationary pressures, or fiscal imbalances. Moving forward, markets are likely to remain volatile as investors weigh the immediate benefits of cheaper liquidity against the longer-term risks of economic slowdown or stagflation. Expect further divergence between speculative assets and the real economy, as central bank intervention may only delay, not solve, underlying economic fragilities.
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