Jerome Powell Confirms Rate Cuts As Labor Market Worries Mount
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Cliff-Notes:
- The Fed's decision to cut rates, signaling confidence in inflation nearing 2% and a cooling labor market, sparked a brief surge in Bitcoin prices.
- Historical patterns show that when the Fed cuts rates to prevent economic slowdown rather than in response to a crisis, risk assets like stocks and Bitcoin tend to rally.
- With rate cuts anticipated and the labor market cooling, Bitcoin is positioned to benefit from increased liquidity.
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Ladies and gentlemen, rate cuts are here. After 28 months of hikes and waiting patiently at the terminal rate, the Fed has decided that inflation is sustainably on the path to 2% and the labor market has reached the point where the Fed doesn't want it to cool any further.
Jerome Powell is quoted as saying "the time has come for policy to adjust," and it is music to the market's ears. Bitcoin surged $1,200 in the 10 minutes after the start of Powell's press conference. Even though it corrected back down after the initial surge, the spike is the most telling. Bitcoin spiking off of the announcement of cuts indicates that bitcoin will react positively when the cuts actually occur:
We've been here before. In August 2019, Powell started performing small, incremental rate cuts to support the slowing economy. The Fed performed 3 consecutive 25-bps rate cuts and then held rates at 1.75%—in that period, the S&P 500 rallied 12.5%. When the Fed cuts in response to a crisis, risk assets like stocks and bitcoin sell-off. However, when the Fed cuts in anticipation of further slowdown, to soften the downturn and avert a recession, risk assets get bid up.
The Fed's 25-bps rate cuts are accommodative, loosening financial conditions and making borrowing easier for businesses, supporting valuations and driving up stock prices. The Fed is aiming to do the same thing this time around. If the Fed can perform these cuts without the labor market deteriorating, the bull market we had in 2019 is how stocks and bitcoin will behave this time around:
The labor market is already cooling substantially, so much so that it elicited these comments from Powell during his remarks:
"The upside risks to inflation have diminished. And the downside risks to employment have increased," he then added, "we do not seek or welcome further cooling in labor market conditions"
14 of the last 20 payroll reports have been revised down after the fact. The strength of the labor market has been consistently overestimated, a pattern that is typical of economic slowdowns:
On a yearly basis, payrolls were revised down by 818,000 jobs from March 2023 to March 2024—the largest downward revision since 2009:
With the outright weakness seen in the labor market and accelerating deterioration seen in recent data, the market is now placing nearly 30% odds that the Fed cuts by a larger 50-bps increment instead of the consensus 25. A total of 200 basis points of rate cuts are expected by next July, bringing the effective Federal Funds rate from 5.3% to 3.3%.
Encouraging businesses to invest and spend by making borrowing cheaper will boost corporate profits and drive stock prices higher. Deficit spending (our federal deficit is currently $1.52 trillion) paired with these rate cuts, without an economic recession, may stoke fears of a reacceleration in inflation.
Any weakness in the economy will be met with further easing; this is the biggest takeaway from Powell's remarks and the market's reaction to them. The Fed responds quickly to these things now, overnight in the case of Silicon Valley Bank's collapse. The Fed put is now firmly underneath markets, and participants are frontrunning the increase in balance sheet capacity that is to come by buying up not just the stocks that will do well on margin expansion, but the great sponges for excess liquidity, namely bitcoin and gold.
If these conditions can remain intact to and through the end of the cycle, Powell will have pulled off what was thought to be impossible: a return to the long-run growth trend for the US economy without dipping into a contraction.
As macro analyst and investor Capital Flows stated on X, bitcoin is a release valve for macro liquidity. With rate cuts on the way, and the labor market cooling but not crumbling, bitcoin is primed to do very well. Ceteris paribus, of course.
Final thought: buckle up, bitcoin holders. I hope you're not on the sidelines.
Take it easy,
Joe Consorti
Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store.