Fed Rate Cuts Loom as USDT Hits Record Highs—What Investors Need to Know Now
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Digital Asset Market: Former President Trump did not discuss their new crypto platform, World Liberty Financial, during a livestream event on X Spaces. However, it was later revealed that the platform will have a token associated with it, with most of it being sold to the public. The platform aims to remove traditional finance barriers and is potentially modeled after DeFi platform Dough Finance. Despite Trump's past criticism of cryptocurrency, he has now embraced it, has even sold NFTs, and has accepted crypto for campaign contributions. World Liberty Financial is working with the DeFi app Aave and aims to drive mass adoption of stablecoins. Due to regulatory uncertainty in the US, the platform's governance token, WLFI, will only be available to accredited investors under an SEC Regulation D exemption. No specific launch date for the token has been announced during the team's live Q&A on X Spaces.
Bitcoin strengthened this morning, trading above $60,000 as of noon EST, as the market awaits the Federal Reserve meeting on Wednesday. The market expects a rate cut, with a 67% chance of a larger 50 bps cut. Inflows into bitcoin ETFs reached $12.9 million. On Polymarket, traders give a 57% chance of a 50+ bps decrease and a 41% chance of a 25 bps decrease. Bitcoin also pulled up other coins with it, with ETH, XRP, SUI, and Fantom's FTM seeing some movement
Macro Economics: The US and Japan are close to reaching a deal to restrict chip technology exports to China's chip industry, intending to curb Chinese firms' access to critical chipmaking tools. Negotiations involve aligning the three countries' export control rules, and the US wants Japan and the Netherlands to restrict servicing and maintenance of tools from those countries, similar to sanctions on US companies and citizens. Japan is concerned about economic retaliation from China and may not want to align with the US's policy. The new export controls will be announced before November's presidential election. China's continued advancements in high-tech despite Western sanctions suggest that these restrictions may not be effective in slowing its rise as a global economic superpower.
Equities: Stocks rose on Tuesday following better-than-expected retail sales data as the Federal Reserve began its two-day policy meeting. This pushed the S&P 500 to close within 0.6% of a record high. Microsoft stock rose after announcing a dividend increase and buyback program, while Intel's shares jumped after securing funding from the Biden administration through the Chips Act. Retail sales increased 0.1%, slightly beating expectations.
The market is uncertain about the potential size of the expected rate cut from the Fed tomorrow, with concerns that a steeper cut may indicate a weaker economy. However, there is increasing confidence that the global economy will experience a soft landing, as reflected in investors' and economists' outlook. This is supported by recent data showing a cooling labor market and declining inflation. Consumer spending also remains strong. As a result, there has been an increase in global investor sentiment and expectations of an interest rate cut from the Fed. The debate remains on the extent of the cut, but overall, the data does not suggest a hard landing for the economy.The Fed and US Treasury: As the Federal Reserve prepares for its first interest-rate cut in four years, market participants are looking to the past for guidance, specifically the soft landing orchestrated by Alan Greenspan in 1995. The main question for Fed Chair Jerome Powell is whether a 25 basis point or 50 basis point rate cut is best for the US economy. Despite potential criticism from both political parties, Powell appears to be in a solid position to decide. While former President Donald Trump may criticize any shift in Fed policy, his focus is more on lowering rates. On the other hand, some Democrats even argue for a more significant 75 basis point cut. Ultimately, Powell's strategy will be judged on its impact on the economy, but politically, facing criticism from both sides can be seen as a sign that he is making the right move.
Geopolitical: Ukraine is still seeking US support for long-range strikes inside Russian territory, but a recent meeting between President Biden and British Prime Minister Keir Starmer did not result in any announcements about the issue. The US has not changed its policy on providing Ukraine with long-range strike capabilities, and there are concerns about the risk of escalation. Despite this, a high-level NATO official expressed support for Ukraine's right to defend itself, even outside its borders. Reports of the US potentially expanding the area where Ukraine could use US-provided missiles, including the possibility of lifting restrictions on certain weapons, have not been confirmed publicly. Previous escalatory steps in the Ukraine proxy war have not been announced by the administration but instead revealed through media reports.
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Despite Bitcoin surging above $60K in recent hours, volatility in the crypto market is expected to remain elevated, primarily driven by the upcoming Federal Reserve rate decision. Rather than focusing on short-term price movements, we recommend a longer-term investment strategy with a macroeconomic view to effectively navigate the unpredictable market environment.
USDT flows have continued to rise, pushing its market cap above $118 billion. Clients clearly prefer USDT due to its faster network speeds, high liquidity, lower gas fees, and increased trust. The use of stablecoins is growing, especially in emerging regions like Latin America and Southeast Asia, where they serve as a bridge between fiat money, digital assets, and non-crypto activities such as savings, payments, and cross-border transactions.
All attention is paid to the Fed's upcoming decision in broader financial markets. The Fed Fund futures market suggests a 61% probability of two rate cuts, with former Dallas Fed President Robert Kaplan advocating for a bold 50 basis point reduction to better position the economy for the latter part of the year. We share this view and anticipate two cuts in the current meeting, followed by one more in the subsequent meetings, totaling 100 basis points by year-end.
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