Just how far will the Fed go with rate cuts next month?

The Federal Reserve is on the brink of slashing interest rates, but the big question is how deep will the cut be? 

Earlier today, Jerome Powell pretty much confirmed that a cut is coming. Now, the market’s all-in on figuring out just how much of a cut we’re talking about. 

Most people are betting on a quarter-percentage point reduction. But, there’s a growing buzz around a potential half-point slash. There’s about a 33% chance of that actually happening, according to the CME Group’s FedWatch tool.

Powell was cagey about the exact timing and the size of the cuts, which has everyone guessing. As per usual. Powell did drop some clues that point toward faster action, especially if the labor market keeps cooling off. He said:

“We do not seek or welcome further cooling in labor market conditions.”

Right now, the Fed’s benchmark rate is sitting in the 5.25%-5.5% range. The market is betting on a full percentage point cut by the end of the year and maybe even more in 2025. 

If the plan was to cut by 25 basis points in September, November, and December, why not just knock out a 50-basis point cut right out of the gate? It makes sense if the Fed is serious about getting rates down quickly.

The upcoming jobs report is the wild card here. If we get another weak showing like July’s—where job gains were a meager 114,000 and unemployment ticked up to 4.3%—the Fed might feel the heat to go for that half-point cut. 

But even if the jobs data comes in stronger, a quarter-point cut is pretty much a lock. Atlanta Fed President Raphael Bostic and Chicago Fed President Austan Goolsbee both hinted that cuts are coming. 

Bostic pointed out that inflation has dropped enough for the Fed to start easing up on the brakes, saying that:

“We can’t wait until inflation is at 2% itself to start moving. Inflation has come way down, so that tells me that we have to really think hard about that.”

When the Fed starts slashing rates, the markets tend to throw a party. Stocks usually pop because investors get all excited about the potential for economic growth. 

But this is where things get interesting for the crypto crowd. Rate cuts often lead to a weaker dollar, and that’s music to the ears of crypto investors. Lower rates can push people to take on more risk, which could light a fire under the crypto market. 

We’ve already seen a bit of that. Bitcoin jumped 1.8% after Powell’s recent comments, pushing past $61,000. Ethereum and Solana weren’t far behind, with gains of 1.7% and 4.5%, respectively.

And it’s not just about individual coins. The whole crypto market cap shot up by more than 4% in just 24 hours, hitting $2.22 trillion. If the Fed keeps cutting, we could see even bigger moves. 

Cryptocurrencies have long been pitched as a hedge against inflation and a way to cash in on low interest rates. If Powell and the Fed decide to go big with a half-point cut, don’t be surprised if we see a full-blown crypto bull run.

Finally.