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On Sunday, the U.S. Federal Reserve slashed the benchmark short-term rate by 100 basis points bringing it to zero. In addition to the rate cut, the Fed promised $700 billion in bond purchases and eliminated all reserve requirements for smaller financial institutions. However, the Fed’s rate cut didn’t help financial markets as stock markets and futures products worldwide have continued to tumble.
The Federal Reserve Slashed the Benchmark Rate to Zero – $700 Billion Will Stimulate Bond Markets
The coronavirus outbreak has caused an economic meltdown of wide proportions and it has invoked central banks worldwide to leverage aggressive monetary policy. On March 15, the U.S. Federal Reserve announced that it was cutting the benchmark short-term rate by 100 bps and plans to inject $700 billion into bond markets. Moreover, the Fed removed reserve requirement buffers on Sunday, which allows them to create loans without being required to keep an insured deposits threshold. The 0% rate is a record low and the emergency action brings the benchmark to levels not seen since 2008. That year, after Lehman Brothers Holdings filed for Chapter 11 bankruptcy, the U.S. central bank brought the rate to zero. The rate remained at that level for seven years and in 2015 the benchmark was lifted. Sunday’s interest rate cut will be maintained until the Fed feels comfortable with lifting it again.
“The [Fed] expects to maintain this target range until it is confident that the economy has weathered recent events,” the central bank wrote on March 15. The big announcement which included stimulating private banks with $700 billion in bond purchases followed the Fed’s stimulus move on March 12. While stock markets and commodities like oil had one of the worst days in history last Thursday, the Fed revealed it would inject about $1.5 trillion into the debt markets. The reason they did this was because the Fed wants to bolster short-term lending to private institutions in order to prevent a Treasury market collapse. During the last seven days, the Fed has fired more monetary policy cannons than it has ever before in such a short period of time.
Gold Bugs and Crypto Proponents React to the Fed’s Monetary Policy Moves
Of course, gold bugs and cryptocurrency supporters made fun of the central bank’s moves and both assets saw a slight lift after the initial announcement. However, digital currencies and gold dropped in value again 6-8 hours later after the Fed’s rate cut. Morgan Creek Digital cofounder Anthony ‘Pomp’ Pompliano tweeted: “Someone needs to say it: The Federal Reserve just panicked and made a major miscalculation.” In a morning note to investors, Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, said that central banks have deployed monetary “bazookas everywhere.” There was a massive coordinated response during the weekend from the Bank of Canada, Bank of Japan, European Central Bank, the Federal Reserve, Swiss National Bank, and the Bank of England. Despite the coordinated effort by a number of central banks, Halley underlined that critical industries are “at the edge of the cliff.”
Despite Peter Schiff’s opinion, gold has been hurting since the market decline on March 12, 2020. At press time, spot gold is trading for $1,473 per fine ounce on March 16, 2020. Silver bullion is just $12 per ounce on Monday morning.
Gold bug and economist Peter Schiff tweeted that the monetary easing worked the first time because “everybody believed it was going to be temporary.” “The financial crisis of 2008 was a cakewalk compared to this,” Schiff added. “All that happened in ‘08 was real estate prices fell, borrowers defaulted, and lenders lost money. Today global commerce is grading to a halt. Production is shutting down. This crisis is economic, not merely financial.” While Schiff predicts that gold will reap the benefits of this storm, a slew of bitcoiners believe that cryptocurrencies will triumph. “With the Federal Reserve cutting interest rates to 0% and also effectively allowing banks to hold 0$ reserves – let’s remember how this whole system is a complete scam,” the account Bitcoin Meme Hub tweeted. “Here is how the money printing machine works. The biggest scam in the history of mankind. Opt-out and buy bitcoin,” he added.
While Sunday’s 100 bps cut was the largest single move in rate cuts by the Federal Reserve since the Greenspan era, the Twitter account Whale Panda said “[I] never seriously thought that we could see hyperinflation in the US and Europe.” “After these last 2 weeks I’ve changed my mind on this,” he continued. “What’s interesting is when you saw this happen in countries like Venezuela they fled to USD. Where will people with USD flee to?” Ethereum proponent Ryan Sean Adams stressed that everything people in crypto have been saying over the last decade is coming to fruition. Adams remarked:
[The] Fed just cut interest rates to 0% — Full QE is on, $700b today — Next is fiscal stimulus, trillions [and] then negative interest, [where you] lose money in your savings account. Then super QE, Fed buying stocks — Everything the crypto people have been saying is coming true — Things are moving faster now.
In a note to investors on Monday morning, Coinshares Group’s head of research Chris Bendikesen noted that the “correlation between gold, bitcoin and equity markets has drastically increased.” “There is an old adage in the asset management industry which points out, that in a crisis, all correlations tend towards 1,” Bendikesen highlighted. “In a liquidity squeeze, a margin call cascade or a general flight to cash, everything is for sale, and everything liquid tends to get sold.” Bendikesen added:
While many in the bitcoin industry have been hailing bitcoin as a new safe-haven asset, at this point it seems clear that proponents of this status have probably gotten a bit ahead of themselves. To be clear, this does not mean that bitcoin is somehow forever barred from attaining such status, but it seems clear that this status has yet to be established.
Cryptoconomy Loses $21B Overnight, BTC Drops Below $5K
Despite the rate cut, cryptocurrencies haven’t seen a massive flight to safety toward censorship-resistant money and people are flocking straight to stablecoins and cash. After the rate cut was announced on Sunday, BTC prices jumped over 8%, touching $5,772 per coin at around 6 p.m. EST. However, BTC dropped sharply a few hours later below the $5K region and market prices are down over 12% today. While ‘Black Thursday’s’ market rout shaved more than $90 billion from the crypto market cap, during Sunday’s overnight into Monday it lost $21 billion.
At the moment most crypto supporters have no idea what the price of BTC or other digital assets will be in the near future. While some believe a crypto market rebound is coming soon, other cryptocurrency speculators are predicting much lower prices. BTC bulls have been pressing toward the $5K region during Monday morning’s trading sessions.
If market panic ensures….it may even go below $3k. I dont know. Its all about liquidity…
I never changed target of $1K on my profile and medium. https://t.co/foF0nglcjq
— Gold, Silver, Geopolitics & Bitcoin (@Super_Crypto) March 16, 2020
Meanwhile, after the opening bell of the U.S. stock market on Monday rang, the top three indexes are down considerably. Nasdaq Composite is down 738, NYSE is down 1,092, and the Dow Jones Industrial Average is down 2,275 points at the time of publication. The zero percent rate cut and the massive stimulus plans don’t seem to be enough to satisfy the markets.
What do you think about the Federal Reserve slashing the rate by 100 bps on Sunday to 0% and pumping $700 billion into the bond market? Do you think crypto markets will rebound in the near future? Let us know what you think about this subject in the comments section below.
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Image credits: Shutterstock, Fair Use, Wiki Commons, Goldprice.org, Markets.Bitcoin.com, and Pixabay.
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