The Fed rate cut and what it means for crypto

Transcript

GM good morning welcome to the milk Road show The Daily crypto show that's as refreshing as stepping off the plane into a new city I'm your host Jay Hamilton and today we are joined by Lark Davis in today's episode we will uncover how significantly the Fed rate cut can impact the markets and specifically the crypto Market on Wednesday this week There's a rate cut coming a lot of questions is that rate card already priced in if not what should we expect to happen if there's no reaction is that a bad sign and most importantly what should you be watching out for when you hear the news coming on Wednesday so you're not fooled by the mass amount of media that comes out all at once before

we jump into today's episode one quick announcement starting this week we are now releasing our show at 3M Eastern every day hope that doesn't make too much of a change in your schedule make sure you tune in every day at 3M and as always want to give a shout out to our friends over at kelp get ready because your reward farming game is about to level up introducing gain powered by kelp your dgen cierge gain is an automated Vault launched by kelp that maximizes rewards for eth users it offers oneclick access to airdrops and points from leading l2s like Linea

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it's our favorite season it's rate cut season everybody loves it when the rates are coming down L on Wednesday this week the FED is going to announce a rate cut I don't I mean I'm putting money in their mouth or words in their mouth I sure hope they announce a r cut it seems very likely I want want to do a show today to talk about what we can expect as a result of those rate cuts from a market standpoint what do you expect to see on Wednesday and historically what would you expect to see them how the markets react rate cuts are here man it's very very exciting obviously everybody wants to know what Drome pal is going to do with the money I feel like in the future we're going to sit

down and sit around the campfire in the post-apocalyptic Armageddon and tell our kids back in the day we used to sit around and wait for one man to tell us what was going to happen with the money um look obviously very impactful for us nerds what's going to happen with the Federal Reserve what has become of Our Lives Jay anyway no seriously very impactful for anybody in markets um look if there's no rate cut that's I think one of the least likely scenarios right now and Jerome Pal's Really Gonna surprise the markets if there's no rate cut coming through that's going to shock everybody because basically everybody thinks that Jerome's late that he should have cut back in July he didn't now everyone's saying Jerome you're late we had the end carry trade crisis that

unfolded and maybe they wanted that to happen they're never going to tell you this but maybe they wanted that to happen they wanted to see some crisis and some real strain to say now we have justification to really start cutting so now it becomes a a question most likely scenario is the feds gonna cut the question is how much are they going to cut now we had Elizabeth freaking Warren out here Penning a letter to the Federal Reserve saying you got to cut 75 basis points there's too much damage has been done this has got to be big you got to go big or go home Jerome and that's kind of where I think the market would look at it's a panic move it's too much and you're not going to of course rely on what Elizabeth Warren is saying or not saying about the rate Cuts but if you

had a 75 basis point cut the market would probably go holy crap something's really broken here and the fed's panicking right so too much is actually not going to be good now the other side of the equation is it going to be 25 or 50 basis points right now the prediction Market markets are favoring a 50 basis point cut because of the weakening in the labor markets that we've seen now is that's what's going to come to pass I don't know nobody knows Drome knows but nobody else knows right so a 25 basis point cut may not be enough the markets may not love that to an extent most of this is already priced into the markets by the way and you probably are going to expect a bit of volatility a bit of a buy the rumor sell the news even in stocks and in crypto we shall see maybe

we bounce Harder Than People expect but usually these big news events get people super super excited and then are a bit of a let down on the reality of like oh my gosh it's only a 25 basis point cut that doesn't really help anybody do anything a 50 basis point cut does provide a little bit of relief and starts moving Us in the right direction and maybe then companies can say hey 25 or 50 basis points companies will be to look and say hey at least we're moving in the right direction the rate Cuts have started we can start doing things because we know we'll be able to refinance our debt because things are going down so we'll be to start taking a bit more of those risks hiring some more people whatever it might be and we can refinance that debt when the rates go

down more later because now it's happening now it's starting etc etc so this starts to become a a spark that kicks off economic activity 25 basis points doesn't really help anybody out the gate but at least sets us in Motion in the right direction 50 basis points that actually can start really moving things along a little bit although a month ago if you talk to people they would say 50 basis points is going to be a bearish cut now it almost seems like it's consensus that we need 50 basis points to be a bullish cut and remember folks when we have a rate cut in a non-recessionary environment it tends to be bullish and I don't know if you've been looking around recently but there has been no recession declared for us

markets so generally should be a bullish event for the longer term over the next months over the next days watch out for volatility in the markets Yeah you mentioned uh that a 25 basis point rate cut doesn't really do much for anybody but if we set back who is affected by this rate cut regardless of it's 25% or 50 sorry where there 25 or 50 basis points who does it affect most immediately and how will it change the flow of money globally not just in crypto yeah so when you really start seeing a lot of rate Cuts coming we get back down to like 3% or something then people are going to be able to start buying houses and stuff again but the current rates is just too high so the

housing Market's not going to get a lot of relief from a 25 or a 50 basis point point cut you're going to need more like 150 basis points of cuts to really start seeing okay people going to start taking Mortage again people start buying properties etc etc but you got to keep in mind with us debt it's got far-reaching global locations because the US is the reserve currency of the world there's a reason why we talk about the Federal Reserve and the US dollar and us treasuries and stuff like this because it's so globally impactful because it is the reserve currency of the world so governments around the world who own US debt will be looking at this move we see all these different people around the world doing carry trades where they can buy local currency at much lower interest rates and buy us

debt and get higher rates of return all these kind of things start to come into play right and so as we start to see interest rates get cut we start to see unwinding in those different plays we could see people selling off treasuries etc etc etc so there's a lot of impacts on how this can actually hit the markets a lot of different ways that may not always immediately apparent foreign governments holding that debt but also then spurring of new economic activity and how that can have a positive impact on the US economy and balance out any sort of deleveraging events that we may see so there's a lot of interesting ways in which these tiny mechanisms can have giant Global impacts and when we think about this rate cut when we look back at historical

rate Cuts they tend to happen in fast sequence because as we know over the past well since the since 2008 when we've been in this period of real monetary monetary policy monetary control by the large governments they have been looking to direct markets quickly and so when we look at the rest of this year what do you expect to happen will we continue to get rate Cuts I think we have two or three more meetings this year and what position could that put us in sort of throughout Q4 so I think the market right now is looking at around 100 basis points of cuts between here and the end of the year so whether we get a little bit less or a little bit more of course remains

to be seen but that's sort of around the base cases around 100 basis point Cuts so basically interest rates in the USA are going to fall by 1% so they're around the 5.25 to 5.5% Mark right now they're going to fall down to the 4.25 to 4.5% right now so that has a lot of impacts on the market because the market starts getting very bullish around this narrative that okay the fed's going to nail the soft land all this kind of stuff will the FED fully nail the soft Landing well it remains to be seen will they avoid a recession right very interesting now there's still a lot of risks we could have no recession but just a stagnant economy inflation could make a a comeback which is of course what everybody's worried about right now with these rate Cuts is that the FED cuts too much too quickly it Spurs too

much economic activity and then inflation starts coming back and that's a problem too so the fed's really got a a very small window to pull this off in terms of lowering r keeping inflation down and making sure nothing blows up in the process and I don't know if they're going to be able to avoid nothing blowing up as long as nothing really big blows up then we're gonna be okay something gonna blow up but let's just hope it's up small even if we get 100 basis points by the end of the year that can be really really big for businesses and so think about businesses that might have been holding off hiring any new people for example or building that buying that new machine or building that new office building or whatever it might be they can now start

looking at doing those sorts of things which starts the trickle effect of creating new economic activity you now you have new people who have new jobs because these companies can borrow money again to Bor uh to hire people and to build things when they're building things that requires more people and more jobs so the more these interest rates go down the more companies feel confident that they can start using the money system again to expand their businesses and to grow the economic pie essentially does having the ETFs make flow for as a result of rate Cuts more likely to happen faster we have larger pipelines now that can come into crypto so if we were to hit these 100 basis points cut

by the end of the year would how would we see that flow come into crypto and how quickly it can come in very very quickly now especially at the top and I know e theorum ETFs have been not so great so far um but that won't last forever as soon as we get more more risk on attitude happening then we're going to see these crypto ETF products really show their strengths and we're already starting to see more risk attitudes we're seeing the low cap stocks in USA starting to get a lot more attention a lot more bid more rotation from those sort of Mega cap tech stocks down into the lower stuff as people seek bigger gains in the market realizing this big Tech at least in the short term you know pretty overextended so when it comes to crypto

specifically people will start taking risk you got to keep in mind there's s trillion dollars or something like this sitting in money market accounts and look at a lot of that's just lowrisk money looking for lowrisk yield but there's a percentage of that that is going to look at the rate cuts that are happening and the falling yields in those money market funds and go well it's time that I take some more risk it's time that I put my money somewhere where it's going to get more than it's going to make sitting in this money market account so we'll see a bit of that there's a huge amount of stable coins specifically Al to crypto hugee amount of stable coins sitting on the sidelines right now that are just ready for that break of probably 72k for Bitcoin to say yes risk on season is

definitely back we're going to start gunning for new highs all that kind of stuff and that can happen very very quickly you know it's crazy to look at the Bitcoin ETF because it's been such a wild runaway success and I know we've had some out days in the past few weeks but then late last week we had a quarter billion day again for inflows right we've had 175 billion dollar total inflows for the Year this by any metric is a wild success for an ETF launch and that money's going to just keep coming in and as more money goes into the top here's how it works Bitcoin is the tip of the spear it always has been and when we start seeing liquidity flowing in from Wall Street into Bitcoin and into ethereum as well that money starts

trickling down now it doesn't trickle down from the Wall Street money per se but because the prices are going up because of those Wall Street inflows onchain whales for Bitcoin and ethereum they start taking profits they start rotating profits into altcoins because they understand how the market flow Works play two scenarios out for us 25% basis cut happens this week 50% basis cut happens this week what what do you think could happen as a result of each of those immediate impact in the markets I think no matter what happens this week expect volatility so if you're using leverage if using leverage just be careful this week guys I know there's

going to be people who will directionally be right on longing or shorting and they'll do that very successfully a lot of people will probably be caught on the wrong end of that and there could be volatility flushes where we see a big drop followed by a big rally and that could happen within a few hours and a lot of people get washed out we see this happen around these kind of big news events so just be careful if you are going to be using leverage keep it low guys okay okay warning from Uncle Arc there in terms of 25 basis point cut I think the market at this point it's going to welcome it obviously but may almost think it's not enough considering how the jobs data and stuff has been so maybe it's not going to be as bullish as we'd like it to be

again rate Cuts in a non-recessionary environment have historically been bullish I don't see any reason why that wouldn't be the case this time although we may have short-term volatility a 50 basis point cut at this point as long as the fed's tone I know we all have to sit around and dissect is how's Jerome talking what are the words that he's using is he being overly hawkish or is he being too doish the markets literally sit around I nerds I know we're all nerds just deal and we'll be here talking about it all week we'll be here talking about it guys anyway but a 50 basis point cut with sort of language around like look this is we see what's going on the jobs Market we want to support jobs markets and etc etc and then of course you still have to watch

jobs Market data over the next few months but a 50 basis point cut could show confidence for the market that the FED is willing to do what it takes to get the jobs markets back back in order so I think the market is probably going to like a 50 basis point cut at this point again a 75 basis point cut if that were to come to fruition would probably not be a good thing is because it's probably going to be seen by the market as the fed's lost control it's too much Etc when Jerome does his speech this week not to uh become overly anal analytical but in nerdy is is there anything you are watching out for or aren't watching out for and for those viewers who are going to see a whole bunch of news across the crypto timeline

what are the what are the red flags or what would be your advice in terms of how to digest that news sure I think at this point it's really all about the jobs data and inflation has come down massively I think we saw the last fall from was it down from 2.8 or 2.9 down to 2.5% so another huge fall in inflation almost back in line with the fed's 2% inflation Target So inflation's currently not a story it could rear its ugly head again if the FED cuts too hard too fast spurring a new inflationary wave which would be bad when it happens but there's a big window between when the rate Cuts start and inflation Peaks up again for markets to Rally higher so there's that to keep in mind okay ah now in terms of the things that he's saying

it's all about the jobs guys it's jobs jobs jobs and that is what fed Chief said last time and I expect him to say very much similar this time now where are we at with jobs what has the recent data been saying well we saw the unemployment numbers fall from 4.3 down to 4.2% that was announced about 10 days ago now so that's a positive that's a positive thing now we are still trending a bit too high for the markets liking there's still a fear that it's going to Trend back up a lot higher but it's all worth keeping in mind that we've just come off of basically record low unemployment and that 4.2% or even 4.3% is historically very very low generally healthy quote unquote

unemployment numbers range between four and 6% so we can go all the way up to 6% and still be within a healthy range the fear of course is how fast it steepens if we slowly grind higher for a few months and get up to five and a half percent or something like that it's still within the realm of normaly but the markets may not like it so you have to keep this in mind but generally the market has been a bit over reactionary towards unemployment data everyone's kind of got this PTSD from previous Market meltdowns that oh my gosh it's going to start steepening really really fast we're going to go from 4.2% to 6% next month and 10% by the end of the year and you have these sort of catastrophic predictions on how things could play out which probably won't come to pass but still that's what the market

is fearing right Market is very much driven by this fear that we are going to have this recession coming sooner and that it's all going to be about the jobs markets so we're GNA be listening to what Drome has to say about the jobs markets the data has been revised down for total numbers of jobs created but we're still around 100K or 100K over per month for us job creation so it's not bad but again they revised the data down which the market didn't like when that happened earlier this month so we just have to keep listening for Jerome and what he's saying about how he sees the jobs markets there is softening in the jobs markets and I think that's going to be used as the main justification for rate Cuts uh this week so if you're Like Us 2 p.m Wednesday tune in for the fomc meeting

press conference no out he probably won't tune in but we will and that's why you keep listening to the show because we'll keep you guys informed Lark thanks so much for breaking everything down for us today I just want to mention I know you're at token 2249 and breakpoint this week in Singapore as our a couple members of the milk Road team so anybody listening if you guys are there watch out for lark and for the milk Road guys they'll be wearing milk Road t-shirts the Milkman won't be there unfortunately but look out for our team there as well because we always love to meet our fans in person thanks so much for listening in everybody have yourself a wicked awesome day as always if you liked today's episode please hit subscribe and make sure you follow us so you don't miss out

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