U.S. Inflation Under Control, Yet Cryptocurrency Market Struggles: What's Happening?
Summary:
In an environment of decreased capital costs and heightened liquidity, high-growth assets like cryptocurrencies often thrive, but despite U.S. inflation seemingly under control, the crypto market is reacting poorly. As per the Fed's policy adjustment, interest rates are often reduced to provide capital for banks in weak economies, decreasing the allure for fixed-income investments. Inflation in the U.S., alongside a 4% unemployment rate and personal income growth, recently led the S&P 500 to hit records. Nonetheless, the U.S. dollar strength affects cryptocurrency performance negatively. There remains uncertainty about the Fed's possible expansionary monetary policy, but a cryptocurrency rally later in 2024 is not to be entirely dismissed.
When capital costs are lower and liquidity is higher, investors often exhibit a greater willingness to take risks. This environment typically benefits assets with high growth potential such as Bitcoin (BTC) and other digital currencies, as increased capital circulation often enhances demand. However, despite the seeming control over U.S. inflation, cryptocurrencies are not experiencing a positive market response, prompting questions as to why.
The U.S. Federal Reserve's (Fed) decisions regarding policy adjustment depends heavily on factors such as the job market, inflation rates, and the overall value of USD. During periods of inflation aligning with the Fed's 2% target, it often paves the way for liquidity injection and interest rate reduction, given that the economy appears to be faltering. This expansionary move tends to reduce the appeal of fixed-income assets.
An evaluation of recent data from the Fed’s favored inflation measure indicates a slowdown in inflation during May this year. For the first time in this economic cycle, inflation exceeded the Fed's 2% target even as the rate of price increase showcased its least growth since March 2021. The core Personal Consumption Expenditures (PCE) index, factoring out food and energy costs, increased by 2.6% from the previous year in May, exactly as economists had foreseen.
Mary Daly, President of the San Francisco Fed, shared with CNBC’s Andrew Ross Sorkin in an interview that this development demonstrates the effectiveness of monetary policy in gently lowering inflation rates. On another positive note, the U.S. Bureau of Economic Analysis reported a month-on-month personal income increase of 0.5%, which beat expectations of a 0.4% increase. However, consumer spending experienced a meager increase of 0.2%, lower than the forecasted 0.3%.
Earlier this year, market traders projected a minimum of three interest rate cuts. However, based on current indications, the expectation has been trimmed to two, expected to begin in September. Seema Shah, the Chief Global Strategist at Principal Asset Management, informed CNBC that slowing inflation, alongside further signs of a weakening job market, would be key factors in initiating the first rate cut in September.
The prevailing inflation data in the U.S., backed by a 4% unemployment rate and personal income growth, led the S&P 500 to achieve a record high on June 28. Conversely, the total market capitalization of cryptocurrencies has declined since its peak on March 14, 2024. Even gold, generally considered a stable investment, is currently just 5% away from its highest levels recorded on May 20.
Paradoxically, stronger U.S. dollar performance tends to result in poor performance by cryptocurrencies. Although reduced interest rates and other expansionary actions theoretically should benefit cryptocurrencies due to their scarcity and non-censorable payment methods, successful implementation of the Fed's strategy could bolster the U.S. dollar—effectively causing foreign currencies to decrease in value relative to the Dollar Strength Index (DXY).
At present, the DXY index is nearing 106, its topmost level since November 2023, while the U.S. 5-year treasury yield has dipped from 4.72% on April 25 to 4.30%. This suggests investor confidence in the economy’s ability to experience a 'soft landing', where inflation falls without triggering a recession. In this scenario, investors likely anticipate continued new highs in the stock market without significant upheavals in the real estate sector.
Such a scenario could explain why cryptocurrencies are not enjoying a boost from lower inflation. However, the economic and U.S. dollar fallout should the Fed decide to utilize an expansionary monetary policy, remains uncertain. Consequently, the potential for a Bitcoin and wider cryptocurrency market rally in 2024 can’t be dismissed.
This piece does not provide investment guidance or suggestions. All investment and trading moves carry risk, and readers should undertake their own comprehensive research before making decisions.
Published At
6/28/2024 9:41:12 PM
Disclaimer: Algoine does not endorse any content or product on this page. Readers should conduct their own research before taking any actions related to the asset, company, or any information in this article and assume full responsibility for their decisions. This article should not be considered as investment advice. Our news is prepared with AI support.
Do you suspect this content may be misleading, incomplete, or inappropriate in any way, requiring modification or removal?
We appreciate your report.