Fed cuts aggressively by 50 bps amid recession fears

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The Federal Reserve today cut interest rates by 50 basis points to 4.75%-5.00%, a move that will influence financial markets in the coming months. This aggressive downsizing signals growing economic concerns among policymakers.

The rate cut, which exceeds the typical 25 bps adjustment, comes in response to several economic indicators. The United States unemployment rate rose to 4.2% in July 2024, the highest level since October 2021. This increase triggered the “Sahm ​​Rule,” a recession indicator that is triggered when unemployment rises by 0.5 percentage points in a period of 12 months. .

July’s jobs report showed 114,000 jobs added, below economists’ expectations of 185,000. These data, combined with inflation of 2.5% (above the Fed’s long-term target of 2%), led to the central bank’s decision.

The 50 bps cut has generated debate among market analysts. Some see it as a necessary step to prevent a possible recession. Others suggest that such a substantial cut could spark fears of a recession, as cuts of this magnitude often precede economic problems.

The market reaction to this news is yet to be determined. Lower interest rates typically hurt the prices of stocks and other risk assets, but investors can interpret the move as a sign of economic weakness.

Major financial institutions adjusted their economic outlook. JPMorgan raised its probability of a US and global recession in 2024 to 35% from 25%. Goldman Sachs raised its odds of a recession next year to 25% from 15%.

The Federal Reserve has indicated that more cuts are likely as it balances inflation control with economic growth and employment support. This suggests that today’s move may be the start of a new easing cycle.

As this policy change takes effect, future economic data and Fed communications will be closely watched. The central bank’s actions will play a role in determining whether the US can sustain growth in the face of current challenges.

Businesses and consumers can expect lower borrowing costs. However, the broader implications of this rate cut and what it signals about the US economy will likely be the subject of ongoing analysis.

Earlier this week, the Federal Reserve was expected to cut interest rates by 50 basis points, likely boosting bitcoin, amid mixed economic signals.

In June, Democratic senators argued that the Federal Reserve should cut interest rates to tame inflation and prevent a recession, in contrast to the policies of the European Central Bank.

In July, economists speculated that the Federal Reserve might prioritize the weakening labor market over inflation concerns in its future rate decisions.

Last month, 10X Research expressed concern that a significant 50 basis point rate cut by the Federal Reserve could have a negative impact on bitcoin, signaling deeper economic problems.

Earlier this week, the Federal Reserve cut interest rates by 50 basis points as economic indicators such as rising unemployment and a weak July jobs report suggested a recession was imminent.

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