The Federal Reserve recently announced a major policy shift that has caught the attention of investors and economists alike. Fed chairman Jerome Powell made the announcement back in August at the Jackson Hole central bank symposium, indicating that the time had come for a change in strategy. Last week, the Fed made a significant move by cutting its federal funds target rate by 50 basis points to 5.00% per annum (upper limit), which was more than what the markets had anticipated before the Federal Open Market Committee (FOMC) meeting. This rate cut came as a positive surprise to the markets, reflecting the Fed’s commitment to supporting economic growth.
The Fed’s decision to cut interest rates may be just the beginning of a series of rate cuts in the near future. Market expectations currently predict three additional cuts totaling 75 basis points by the end of the year, and another five cuts totaling 125 basis points by December 2025. The Fed has also hinted at further rate cuts through its latest Summary of Economic Projections (SEP), commonly known as the “dot plot.” Despite the 50 basis point rate reduction, it is possible that the Fed is still lagging behind in its response to economic conditions.
According to a standard Taylor rule based on the unemployment rate and core PCE inflation, a fed funds target rate of approximately 3.6% per annum would be justified based on the underlying economic and inflationary trends. Additionally, a recent survey of fund managers by Bank of America indicated that monetary policy was considered too restrictive in September 2024, marking the most restrictive stance since October 2008. There are also concerns about the risk of a recession, as evidenced by indicators like the “Sahm rule” which remain activated.
Despite these challenges, there are potential opportunities for certain assets like bitcoin in the current economic environment. Our analysis suggests that global economic growth may have less impact on bitcoin’s performance compared to factors like monetary policy and the strength of the US dollar. In the event of a US recession, bitcoin and other cryptocurrencies could benefit from increased expectations of further Fed rate cuts and potential weakness in the US dollar, creating a favorable environment for these alternative assets.
The recent policy shifts by major central banks around the world have signaled a turning tide in global liquidity. Money supply has reached new all-time highs and is accelerating, typically associated with bullish trends for bitcoin. The re-steepening of the US yield curve, while often a sign of an impending recession, also indicates increasing liquidity which can be positive for scarce assets like bitcoin.
Furthermore, the increase in global liquidity coincides with the decreasing supply of bitcoin due to the halving event that took place in April 2024. Our analysis indicates that there is a significant lag between the halving event and the impact on supply, as the supply deficit tends to accumulate gradually over time. This convergence of increased potential demand and reduced available supply could set the stage for a significant shift in bitcoin’s performance.
The market for bitcoin has experienced a period of consolidation since reaching its all-time high in March 2024, influenced by factors such as government sales of bitcoin and the Mt. Gox trustee’s distribution of bitcoins. However, historical trends suggest that Q4 tends to be a strong period for bitcoin performance, potentially leading to a breakout from the current consolidation phase. The recent Fed policy change could serve as a catalyst for this breakout, driving new momentum in the market.
In conclusion, the Federal Reserve’s recent policy shift has significant implications for the economic landscape and financial markets, including the cryptocurrency sector. As investors navigate the changing environment, it will be crucial to monitor how these developments impact various asset classes and adjust strategies accordingly. The intersection of global liquidity trends, monetary policy shifts, and supply dynamics in the cryptocurrency market presents both challenges and opportunities for investors seeking to capitalize on emerging trends.
