Federal Reserve Predicted to Hold Rates; Impact on Bitcoin and Global Market Revealed
Summary:
The Federal Reserve is expected to maintain current rates for longer than predicted, despite earlier indications of a cut by May 2024. This continues to be backed by economic data that shows the CPI index and the Fed's preferred PCE index on the rise due to unrestrained consumer spending. While the persistent rates might discourage risky assets like stocks and Bitcoins, Bitcoin's deep integration into traditional financial markets means it might mirror their behavior until rates decrease. Despite a possibly uneventful summer, the Bitcoin investment rationale remains strong in the long term, especially once the Fed action leads to renewed dollar weakness.
Just a few months back, the anticipation was rife that the Federal Reserve would commence rate cuts by May. There was ample evidence to back this expectation: inflation seemed to be on the wane, employment data hinted at a slowdown in job market growth, and consumer confidence was on the decline. However, as we moved towards the Federal Open Market Committee (FOMC) gathering in May, the likelihood of an early rate cut in 2024 seemed to be fading away. The Federal Reserve is now forecast to maintain the current rates for a significantly longer period than what had been originally projected in January. Some experts opine that we might be looking at a "higher for longer" scenario up until 2025, despite the impeding presidential elections. Whether the rates persist till September or are carried forward to the next year, the May FOMC meeting was a stark contrast to December 2023 when Jerome Powell, the Federal Reserve Chairman, first broached the subject of rate cuts, triggering pandemonium in the markets. Currently, a far more determined committee is grappling with persistent inflation and a surprisingly resilient job market.
While discouraging for risk-prone assets like stocks and cryptocurrencies, the Federal Reserve's decision should not come as a shocker to those who regularly follow economic data. The preferred metric for inflation for the Federal Reserve, the PCE index, soared from 2.5% in February to 2.7% in April. In the same vein, the CPI index stayed relatively stable, rising from 3.2% in February to 3.5% in March, driven by unrestrained spending that has led consumers to accrue more debt rather than being cost-conscious. In fact, the domestic savings rate has been on a steady decline, down from 4.1% in January to just 3.2% in March, while household debt levels have been breaking previous records. Adding to this, unemployment figures have continued to remain steady, with the unemployment rate dropping from 3.9% in February to 3.8% in March, maintaining near historical lows. Jerome Powell has continued to refrain from revealing when the Federal Reserve might initiate rate cuts.
Now, even though there are early signs of the economy decelerating — with the GDP growth for the first quarter being a disappointing 1.6% against the expected 2.4% - we're still far from a slowdown substantial enough to warrant stimulus via rate cuts. Powell has always strongly held that the Federal Reserve's monetary policy decisions will be dictated purely by data and current indicators do not advocate a more lenient approach. As expected, the market has not been taking this news lightly. Bitcoin (BTC) was meandering between $60,000 and $65,000 the week leading up to the FOMC meeting and stock markets worldwide were muted as the potential for a hawkish turn increased. At the same time, the dollar grew stronger, pushing down other global currencies such as the yen, which fell to its lowest level against the dollar since 1990. Other emerging market currencies are likely to follow suit. Jerome Powell stated that it was "unlikely" the Federal Reserve's next move would be a rate hike.
The sobering news is that we are most likely going to be in this state for several months. This is a disappointment for those who were banking on the Bitcoin halving to usher in a bullish run leading to a new all-time high. After the wild price fluctuations of the past few months, no one was prepared for yet another extended period of sideways trading. Bitcoin is expected to be caught in a narrow band — below $70,000 — provided no major global catastrophe occurs prompting investors to seek safer options. Up until now, Bitcoin has paid little attention to macroeconomics — it took the recent inflation announcements in stride. However, the Federal Reserve's change in stance will undeniably have a greater impact. Given that Bitcoin is deeply entwined in the fabric of traditional financial markets due to spot ETFs, it is very likely to closely mirror the behavior of other risk-prone assets until the rates decline. Thus, thanks to Jerome Powell, investors need to brace themselves for a rather uneventful summer.
Yet, this is not to suggest that there will not be another Bitcoin party — it is on the horizon, and it may even eclipse what we've seen already this year. Over the long haul, the Bitcoin investment rationale holds strong. Powell's pronounced hawkishness may give a temporary lift to the U.S. dollar for now, but it's just a matter of time before the Federal Reserve finally decides to take action, triggering renewed weakness in the dollar. As the dollar starts to lose its footing, Bitcoin could serve as a sanctuary against currency depreciation. At that point, U.S. spot BTC ETFs will come into their own, rewarding patient investors who were able to weather the drought and withstand the test of time. Until then, it might be worthwhile to hold off tinkering with investment portfolios and enjoy the summer months instead. Lucas Kiely, the chief investment officer for Yield App serves as an overseer of investment portfolio allocations and leads the effort to broaden the array of diversified investment products. Prior to this, Kiely was the chief investment officer at Diginex Asset Management and a seasoned trader and managing director at Credit Suisse in Hong Kong, overseeing QIS and Structured Derivatives trading. Furthermore, he held the role of head of exotic derivatives at UBS in Australia. This article serves to provide general information and should not be seen as legal or investment advice. The opinions shared here belong solely to the author and do not represent the views and beliefs of Cointelegraph.
Published At
5/1/2024 10:38:39 PM
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