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This Monday, global stock markets collectively crashed, and the crypto market also experienced severe volatility.
BTC briefly fell to $49,000, while ETH’s decline exceeded 26%, breaking below the $2,100 mark. Within 24 hours, more than 230,000 people had their crypto positions liquidated, with a total liquidation amount reaching $883 million.
Panic intensified, leading the market to price in the possibility of an emergency rate cut by the Federal Reserve. The prediction market platform Polymarket’s forecast for a 2024 emergency rate cut by the Fed once rose to 50%.
Historical Instances of U.S. Emergency Rate Cuts
1998 Asian Financial Crisis
Background:
The Asian financial crisis, particularly the Russian debt crisis and the collapse of Long-Term Capital Management (LTCM), increased global financial market turmoil. On October 15, 1998, the Fed made an emergency rate cut of 25 basis points.
U.S. Stock Market Performance:
- Short-term: Major indices rebounded significantly in the short term.
- Long-term: Laid the foundation for the 1999 bull market, with the S&P 500 index rising 19.5% for the year.
2001 Dot-com Bubble Burst
Background:
The burst of the tech stock bubble in 2000 led to a significant market downturn and increased recession risks. On January 3, 2001, the Fed cut rates by 50 basis points and continued with multiple cuts throughout the year.
U.S. Stock Market Performance:
- Short-term: The NASDAQ index rose 14.2% on the day of the rate cut but continued to decline in the following months.
- Long-term: The stock market didn’t go well throughout 2001, with the NASDAQ index dropping about 20% for the year.
2001 9/11 Terrorist Attacks
Background:
Following the 9/11 terrorist attacks, the U.S. stock market was closed for four days, causing global market turmoil and economic uncertainty. On September 17, the day the stock market reopened, the Fed made an emergency rate cut of 50 basis points.
U.S. Stock Market Performance:
- Short-term: The Dow Jones Industrial Average (DJIA) fell by 684.81 points (7.1%) on the day of the rate cut. The S&P 500 and NASDAQ indices also fell by 4.9% and 6.8%, respectively.
- Long-term: By the end of 2001, the stock market had partially recovered but overall performance remained poor, with the S&P 500 index dropping about 13% for the year.
2007-2008 Global Financial Crisis
Background:
Triggered by the subprime mortgage crisis, the global financial crisis led to bank bankruptcies, market panic, and economic recession. The Fed first made an emergency rate cut of 50 basis points on September 18, 2007, followed by multiple emergency cuts in 2008, including a 50 basis points cut on October 8.
U.S. Stock Market Performance:
- Short-term: Market volatility persisted.
- Long-term: The stock market performed extremely poorly throughout 2008, with the S&P 500 index dropping 38% for the year.
2020 COVID-19 Pandemic
Background:
The outbreak of COVID-19 led to a global economic shutdown, stock market crashes, and market turmoil. The Fed made two emergency rate cuts on March 3 and March 15, 2020, totaling 150 basis points.
U.S. Stock Market Performance:
- Short-term: Despite the Fed’s emergency rate cuts, market panic continued, with the S&P 500 index hitting a bottom in mid-March.
- Long-term: Supported by fiscal and monetary policies, the stock market rebounded strongly in the second half of 2020, with the S&P 500 index rising 16% for the year.
Emergency rate cuts are a significant tool for the Fed to address economic crises, but their effects and long-term impacts must be evaluated within a broader economic context.
What Are the Chances of a Fed “Emergency Landing” This Time?
There is some debate over whether the Fed should make an emergency rate cut. Some believe it is not yet time for an emergency rate cut, arguing that it could heighten market panic.
Fed’s Goolsbee remarked that all options, including rate hikes and cuts, remain on the table. If the economy deteriorates, the Fed will take measures to address it.
Analyst Marcus Ashworth stated that while global stock markets are plunging, traders are discussing the possibility of an emergency rate cut by the Fed. However, he believed this was unlikely and could be counterproductive.
The Bank of America securities brokerage team reported that a September rate cut was almost certain, but there was no need for aggressive cuts that could lead to a recession.
HQ Trust’s Chief Investment Officer Christian Subbe indicated that while the Fed might not cut rates before the September meeting, officials’ rhetoric may become more dovish to calm the markets.
Some radical analysts argued that the Fed has reasons to act before the September meeting, with a 60% chance of a 25-basis point rate cut within a week.
Renowned U.S. economist Jeremy Siegel suggested that the Fed should immediately cut rates by 75 basis points.
Nigel Green from deVere Group warned that delaying a rate cut until the September meeting would be a dereliction of duty and called for an immediate 25-basis point cut, with some analysts suggesting up to 75 basis points to avoid a recession.
Conclusion
Whether an emergency rate cut is needed is a complex decision process, requiring consideration of multiple economic data and forecasts, including economic data, market performance, inflation rates, unemployment rates, and global economic conditions.
For now, it is certain that global capital markets are experiencing severe volatility, and the market has shifted its focus from whether the Fed will cut rates in September to how much it will cut. Currently, investors and analysts widely expect that the September rate cut could start at 50 basis points or more, based on current economic data and the uncertainty of the global financial environment.
The Fed’s next rate decision is scheduled for September 18 and will have a significant impact on the market. HTX, as a leading global digital asset trading platform, will continue to monitor financial market dynamics and be alert to potential liquidity crises in the crypto market.
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