Key Takeaways:
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The Fed may pause rates but inject liquidity. Crypto could rally as a recession hedge.
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The weak US dollar and gold rally signal a shift to scarce assets.
The upcoming US Federal Reserve Open Market Committee (FOMC) interest rate decision promises to be pivotal for risk-on assets, including cryptocurrencies. There is a consensus predicting no change in interest rates, but Bitcoin (BTC) and altcoins could see an uptick if liquidity injections from the US Treasury are implemented to avert a potential economic recession.
A shift to a more accommodating monetary policy could spur economic activity. However, the Federal Reserve is also grappling with a weakening US dollar. Some analysts argue that a reduction in interest rates from the Fed may not adequately stimulate growth due to persistent recession risks, potentially fostering an environment conducive to alternative hedge assets like cryptocurrencies.
Economist and investor Jim Paulsen argues that when Fed funds trade above a “neutral” interest rate, historical trends indicate a movement toward recession or what is termed a “growth recession,” characterized by sluggish growth along with rising unemployment and diminished consumer demand. This analysis is substantiated by patterns observed since 1971.
According to Paulsen, a rate reduction from the Fed appears to be inevitable. Additionally, central bank Chair Jerome Powell faces considerable pressure from US President Donald Trump, who has expressed dissatisfaction with the pace of capital cost reductions.
Reasons Why the Fed May Start Easing
Concerns about overheated markets persist, as the US consumer inflation surpasses the 2% target, and unemployment figures for April sitting at 4.2% indicate no visible signs of economic weakness.
Market expectations as indicated by Treasury yield futures reflect a 76% probability of interest rates dropping to 4.0% or below by September 17. This likelihood has notably decreased from 90% on April 29, according to the CME FedWatch tool.
Trader confidence in the Fed easing monetary policy seems to be wavering. While this initially appears bearish for risk assets, it might compel the Treasury to inject liquidity into markets to bolster government spending.
Regardless of the FOMC’s decision, some experts highlight the Fed’s recent $20.5 billion Treasury bond purchase on May 5 as indicative of renewed market intervention. Historically, increased liquidity has been bullish for cryptocurrencies, particularly as the US dollar struggles against other major global currencies. As a result, investors are increasingly gravitating towards alternative hedges rather than maintaining cash positions.
Related: Bitcoin price rallied 1,550% the last time the ‘BTC risk-off’ metric fell this low
The US Dollar Index (DXY) has dropped below 100 for the first time since July 2023, as investors steer clear of US markets amidst economic uncertainty. Concurrently, gold has surged over 12% in the past month, now just 2% beneath its all-time high of $3,500. A faltering belief in the US Treasury’s capacity to manage its debt favors scarce assets, including Bitcoin.
Although the likelihood of multiple rate cuts has diminished, such a scenario could still be advantageous for cryptocurrencies. Should the Fed find itself pressurized to enlarge its balance sheet, it would likely escalate inflation and diminish the value of fixed-income investments, effectively bolstering support for cryptocurrencies.
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