As a seasoned crypto investor with a knapsack full of market wisdom and a scarred heart from Black Mondays past, I must admit that the latest developments have me both intrigued and cautious. The U.S. Treasury buyback plan and the anticipated interest rate cuts by the Federal Reserve are reminiscent of the pre-Lehman Brothers days, when the global financial system was teetering on the edge of a precipice.
On Tuesday, August 6, 2024, the United States will kick off its ambitious Treasury bond-buying program. This plan involves purchasing $50 billion in Treasury bonds every month. Notably, this move coincides with the U.S. Federal Reserve’s anticipated announcement of an emergency reduction in interest rates.
U.S. Treasury Buyback Plan
As an analyst, I’ve been following the latest schedule, and here’s what I can anticipate: Starting from August, our program kicks off with a $8.5 billion bond buyback. This will be followed by an impressive $31.5 billion Treasury bond buyback in September. Moving forward, we’ll initiate another purchase of $10 billion worth of bonds in October. The purpose behind these actions is to regulate the flow of government bonds within the market and maintain a healthy level of liquidity.
At the same time, there’s a lot of discussion in financial circles regarding the possibility of an unexpected interest rate reduction by the U.S. Federal Reserve. Wharton professor Jeremy Siegel has openly expressed his belief that such a reduction could be substantial. In fact, he suggested a 0.75 percentage point emergency cut initially, followed by another potential 0.75 percentage point reduction in September, as stated during an interview with CNBC.
Certainly!
Furthermore, Siegel voiced his criticism towards the Federal Reserve for failing to act even as both inflation and employment rates showed substantial progress. In his view, “We’ve nearly reached 90% of our target for reducing inflation. Conversely, we’ve exceeded our target on employment.” He emphasized these points in his argument.
In addition, Robert Prechter, a well-known financial analyst and the president of Elliott Wave International, anticipates an unexpected interest rate reduction. According to him, the Federal Reserve may take action ahead of their planned meeting in September, given the recent upheaval in the market.
Probability For 50 Bps Cut Soars
In simpler terms, Prechter believes there might be an unexpected reduction in interest rates prior to the September meeting. He suggests that this is happening because interest rates are decreasing at a quicker pace than before. Interestingly, he reminds us of a previous instance when the U.S. Fed reduced rates during the peak of the Covid-19 pandemic, as a reaction to concerns about a worldwide economic crisis. This past event could indicate that a rate cut may occur in the current situation as well.
On the other hand, not everyone among economists is optimistic about this situation. Some counterarguments suggest that a rate cut in an emergency context might imply that both the U.S. and global economy are facing serious difficulties. This could potentially exacerbate market instability, as noted by experts like Peter Schiff and Scott Melker.
Even though there are conflicting market reactions, the CME FedWatch Tool suggests that there’s a 74.5% likelihood of a 0.5 percentage point interest rate decrease in the September meeting. Additionally, there’s a 25.5% chance of a 0.25 percentage point cut. The responses from the market to these predictions have been varied. Polymarket, an online betting platform, initially showed a 55% probability of an emergency rate reduction yesterday, fueled by whispers of a possible emergency Federal Reserve meeting. However, these probabilities have since dropped to 18%, likely due to the lack of any official announcement.
The U.S. Treasury’s buyback program is viewed as a supporting action alongside possible interest rate reductions. Its goal is to strengthen financial markets by decreasing the amount of Treasuries available for sale. By doing so, the government intends to boost bond prices and control yields. This move could indirectly contribute to economic stability during recession worries. In light of these events, the crypto market has shown signs of recovery following Black Monday, providing some reassurance.
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2024-08-06 12:38