The Fed’s Recent Rate Cut and Its Implications for Bitcoin and the Crypto Market
In a pivotal moment during the Jackson Hole central bank symposium this past August, Federal Reserve Chairman Jerome Powell declared, “The time has come.” This statement marked a significant shift in the Fed’s monetary policy. Last week, the Federal Reserve took a decisive step by reducing its federal funds target rate by 50 basis points (bps) to an upper limit of 5.00% per annum. This move was slightly more aggressive than what market analysts had anticipated prior to the Federal Open Market Committee (FOMC) meeting, effectively surprising many participants in the financial markets.
The prevailing sentiment in the market suggests that the Fed is just beginning its journey of rate cuts. Current expectations indicate that market participants foresee three additional cuts, totaling 75 bps, by the end of this year, with a further five cuts amounting to 125 bps anticipated throughout 2025. The Federal Reserve’s latest Summary of Economic Projections (SEP), commonly referred to as the “dot plot,” has also signaled a pathway for further cuts. This outlook creates an environment where the Fed’s monetary policy appears increasingly accommodative.
However, despite this unexpected reduction of 50 bps, it is crucial to recognize that the Fed might still be lagging behind in addressing the economic landscape. According to a standard Taylor rule, which evaluates the federal funds target rate based on factors like the unemployment rate and core Personal Consumption Expenditures (PCE) inflation, a rate of approximately 3.6% per annum would be more appropriate given the current economic momentum and inflationary pressures. This discrepancy suggests that the Fed’s actions may not fully align with the economic reality on the ground.
Moreover, insights from the latest fund manager survey conducted by Bank of America reveal that monetary policy was still viewed as “too restrictive” as of September 2024. In fact, the survey indicated that it is the most restrictive stance observed since October 2008. This restrictive environment raises concerns about the potential for an economic recession. Various reliable indicators, such as the “Sahm rule,” remain activated, suggesting heightened recession risks.
Nevertheless, our quantitative analyses reveal an intriguing trend: global economic growth appears to be becoming less relevant to Bitcoin’s performance. Instead, factors such as monetary policy and the strength of the US dollar are gaining prominence. This leads to the conclusion that a US recession might not be as detrimental to Bitcoin and other cryptocurrencies as many investors fear. Rather, it could ignite expectations for further Federal Reserve rate cuts and a weakening US dollar, ultimately providing a positive tailwind for the crypto market.
The recent actions taken by the Fed, along with similar moves by other major central banks globally, signal a significant shift in liquidity dynamics. The global money supply has reached unprecedented levels, with growth accelerating rapidly. Historical patterns indicate that periods of expansionary money supply growth often coincide with bullish trends in Bitcoin’s price. Additionally, the recent re-steepening of the US yield curve, which is typically associated with recessionary conditions, suggests an increase in liquidity. This increased liquidity is generally advantageous for scarce assets such as Bitcoin, enhancing their appeal to investors.
Furthermore, this uptick in global liquidity aligns with the growing supply scarcity of Bitcoin. Since the latest halving event in April 2024, the supply dynamics of Bitcoin have tightened, leading to increased scarcity. Our research indicates that there tends to be a significant lag between the halving event and the moment when the supply shock starts to manifest in the market. This gradual accumulation of supply deficit could have profound implications for Bitcoin’s price trajectory.
It appears that we are witnessing a perfect confluence of factors: an uptick in potential demand driven by global money supply expansion, coupled with a simultaneous reduction in supply due to the halving. As the market has continued to experience “chopsolidation”—a term describing a choppy, consolidating, and range-bound market—since Bitcoin’s all-time high in March 2024, external factors have contributed to this stagnation. Factors such as government sales of Bitcoin, distributions by the Mt. Gox trustee, and macroeconomic capitulation in early August 2024 have all played a role in shaping market sentiment.
Historically, the summer months have been challenging for Bitcoin, with September often marked as the worst month of the year for the cryptocurrency. However, as we approach the fourth quarter, historical patterns suggest that it is typically the most favorable period for Bitcoin in terms of performance. Many analysts, including ourselves, anticipate that Bitcoin will break free from its chopsolidation phase during Q4, potentially spurred by the Fed’s pivot towards a more accommodative monetary policy.
In conclusion, the recent Federal Reserve rate cut may serve as a crucial catalyst for Bitcoin’s potential breakout. As market participants recalibrate their expectations in light of changing monetary conditions, the stage is set for a possible resurgence in Bitcoin’s price. The intersection of increased liquidity, reduced supply, and favorable historical performance patterns could create a compelling narrative for the cryptocurrency as we move into the final months of the year.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
