In the latest report, Binance analyzes the 0.5% reduction of the target rate for federal funds by the Fed.
This intervention has opened a new cycle of rate cuts, followed by a further reduction of 0.25% in the November meeting. It is a move that reflects the dual mandate of the Fed: to promote maximum employment and maintain price stability, objectives that profoundly influence both the global economy and the financial markets.
The analysis by Binance on the Fed’s interest rate cut
The decision of the Fed to reverse course from the previous aggressive policy of rate hikes was made possible by the gradual cooling of inflation, which had reached a peak of 9% in mid-2022.
After raising rates to the highest level in the last 20 years to counter the inflationary crisis, the central bank has now chosen to facilitate access to credit, making money cheaper. This strategy aims to stimulate the economy in a context where market expectations indicate further cuts of 1-2% by 2025, with a 62% chance of an additional 0.25% reduction in December.
Interest rates represent the “price of money.” Reducing them not only lowers the cost of debt for businesses and consumers but also encourages investments in riskier assets, in search of higher returns compared to those offered by government bonds. This dual stimulating effect is the basis of the positive response that stock markets often show in the face of cycles of rate cuts.
Impacts on financial markets
A historical analysis, using the S&P 500 as a benchmark indicator, reveals that interest rate cuts have generally supported stock markets. In particular, over a 3, 6, and 12-month time horizon, the index tends to record increases, except for rare exceptions related to recessionary periods.
This trend reflects a structural movement of U.S. stocks, which have benefited from progressively lower interest rates over the last 50 years, moving from levels of 8-10% in the ’80s to almost 0% in the last decade.
Cryptos, although with a more recent history, have shown an interesting relationship with rate cuts. After the March 2020 cut, the sector recorded a 537% year-on-year growth, indicating that the additional liquidity injected into the system also favored investments in high-risk digital assets. However, the relationship between interest rates and criptovalute remains relatively unexplored, as these assets have been involved in only two bull and bear cycles of cuts to date.
Effects on commodities and bonds
The relationship between interest rates and commodities is more complex, influenced by the cost of inventories, exchange rates, and their role as a hedge against inflation. Commodities, often leading indicators of inflation, can benefit from an expansive monetary policy, but their trend depends on multiple economic and geopolitical factors.
Different is the case of fixed income instruments, such as bonds, which have an inverse relationship with interest rates. When rates fall, the value of bonds increases, offering interesting returns to investors. This mechanism makes them particularly attractive during rate cut cycles.
The rate-cutting cycle started in 2024 marks a turning point for the global economy. With inflation under control and a Fed oriented towards stimulating economic growth, investors look to 2025 with expectations of further reductions. However, the actual impact of this policy will depend on numerous variables, including geopolitical stability, the regulatory environment, and the ability of companies to translate the reduced cost of credit into real growth.
The sectors most sensitive to these dynamics, such as technology stocks, emerging markets, and cryptocurrencies, could register significant gains, but not without risks. The challenge for investors will be to navigate an environment where return opportunities are balanced by macroeconomic uncertainties.
Conclusion
The report from Binance offers a clear and structured overview of the impact of the Fed’s interest rate cuts, highlighting the implications for various financial assets. The Fed’s decision reflects an evolution of economic priorities, shifting from the fight against inflation to supporting growth.
While the markets react positively in the short term, the global economic context will continue to be influenced by expansive monetary policies, offering opportunities and challenges for all participants.
