U.S. Federal Reserve cuts interest rates sharply

Yesterday (March 3) at 23:00 Beijing time, the Fed suddenly announced a 50 basis point cut in the benchmark interest rate and reduced the excess reserve ratio (IOER) by 50 basis points to 1.1%. The US Federal Open Market Committee (FOMC) unanimously agreed to a rate cut. This is the ninth unconventional meeting of the Federal Reserve since 1998 to cut interest rates. At the same time, the central banks of Australia and Malaysia have followed suit after they announced interest rate cuts.

The US Federal Open Market Committee unanimously agreed to a rate cut. The Fed explained that the reason for the rate cut is because the virus poses changing risks, will closely monitor economic development and its impact on the economic outlook, and will use relevant tools to take appropriate actions to support the economy. However, the FOMC said that the fundamentals of the US economy remain strong. The US Federal Funds rate futures show that there will be more interest rate cuts in 2020, and US President Trump also tweeted shortly after the Fed's emergency rate cut that the Fed still needs (further rate cuts to achieve) more loose monetary policy. According to CME Fed observations, the market still has a 68.6% probability that the Fed will further cut interest rates by 25 basis points to 0.75% -1.00% in April.

Earlier, Fed Chairman Powell and other G7 finance ministers stated that they would "use all appropriate policy tools to achieve strong and sustainable economic growth and protect against downside risks." This echoes Powell's statement last Friday. The sudden emergency interest rate cut triggered a violent shock in global financial markets.

After the news was announced, the US dollar index fell sharply by nearly 60 points, hitting a new low of 96.92 since January 8 this year. Spot gold surged by 20 US dollars to a new high of 1628.80 in the week. The three major US stock indexes rebounded quickly after a short rebound. US Treasury bonds fell below the 1% integer mark during the session to a record low, and British 2-year Treasury bonds also fell rapidly to a new low of nearly two and a half years.

However, the cryptocurrency market represented by Bitcoin has not yet made a relatively straightforward follow-up during this period, and the mainstream currencies have basically flattened overnight, even after the news was released as soon as possible. Bitcoin also did not see follow-up feedback when there were significant asset fluctuations. In terms of short-term market performance alone, the cryptocurrency market and traditional financial markets have once again “decoupled” in the recent period of time, and this relatively stable The performance of the independent market may become a “passive advantage” for cryptocurrencies to be refocused by market liquidity in an unstable environment.

OKEx senior analyst William analysis pointed out that, theoretically, the Fed's interest rate cuts in the medium to long term will drive up the price of Bitcoin. The interest rate transmission mechanism has two main paths:

One: loose monetary policy → market interest rates decline → bank credit increase → global liquidity increase → part of the increased capital flows into the digital currency market, driving prices up

Second: loose monetary policy → market interest rates drop → dollar-denominated return on assets decline → funds flowing out of the US dollar market and the dollar depreciating → some funds flowing into the digital currency market and prices rising

Of course, considering that digital assets such as Bitcoin have not been included in the asset allocation pool of global investment institutions, the timeliness of interest rate transmission is poor, so it is not surprising that Bitcoin will have limited response to the Fed's interest rate cuts in the short term. The real impact is expected Need to be gradually revealed in the medium and long term.

The curtain of "global interest rate cuts" has just begun

It is worth mentioning that in addition to the central banks that have already cut interest rates (loose) mentioned above, in the near future we are likely to see more economic central banks join the ranks of interest rate cuts.

The Bank of Canada will announce its interest rate resolution on March 4. The Bank of Canada's policy rate is currently 1.75%. Bank of Canada policy makers have not commented on any public health incident, but said at the last meeting that interest rates could be cut if necessary. Wells Fargo believes this indicates that the Bank of Canada may be ready to cut interest rates as soon as this week. Considering the fragility of the global economy and financial markets, the Bank of Canada's failure to implement interest rate cuts this week could adversely affect its economic outlook. In addition, it is expected that from now until the end of the second quarter, the Bank of Canada will cut interest rates by 25 basis points twice, with a cumulative rate reduction of 75 basis points.

In addition, the Bank of England is likely to cut interest rates by 25 basis points at its March 26 meeting. And even the European Central Bank, which is currently in a negative interest rate situation, may not be able to escape the fate of further interest rate cuts, although the European Central Bank has stayed at the interest rate level of -0.5% for a long time before the outbreak of the public health event at the beginning of the year. For a period of time, and the European Central Bank ’s further operating space is indeed limited at this level of interest rates, but the crisis has caused new stimulus needs to be imminent. Therefore, in the future, the European Central Bank is expected to choose between an additional 10 basis points of interest rate cuts or accelerated asset purchases. To provide additional policy support.

According to incomplete statistics, as of March 3, the number of confirmed cases of new coronary pneumonia outside of China has reached tens of thousands, and the market expected to be affected by the epidemic is continuously extending. In this case, it is inevitable that the global economy will be hit hard. Therefore, major economies Central banks have launched emergency easing policies in the hope that it is inevitable that the global financial market will be stabilized at the policy level.

As stated in the analysis above, with the increasingly unstable outlook of traditional large-scale assets, bitcoin that can achieve “excellence” in the near future and is expected to benefit from easing policies in the medium and long-term perspective is becoming more With investment value.