No Fed Rate Cuts? No Worries For Bitcoin, Says Research Firm

by

In light of increasing inflation fears and reduced predictions for Federal Reserve interest rate reductions in the US economy, Bitcoin‘s market remains robust, as indicated by Reflexivity Research’s comprehensive analysis. While analysts at Bank of America anticipate a 4.8% US CPI inflation rate by November 2024 elections, these conditions appear less promising for easier monetary policy. Surprisingly, however, the cryptocurrency sector, specifically Bitcoin, shows signs of resilience and optimism in the face of these challenges.

Bitcoin Unfazed By Delayed Rate Cuts?

The bond market currently predicts that the Federal Reserve will make just three interest rate reductions in 2023, which is fewer than the previous projection of six. According to the CME FedWatch tool, most investors believe that a rate cut won’t take place until after the FOMC meeting in mid-September. This shift in expectations reflects market participants adjusting their beliefs about the Federal Reserve’s ability to control ongoing inflationary pressures.

In the midst of significant economic changes, Ritik Goyal shares an insightful perspective in a blog post for Reflexivity Research, entitled “The Fed Cannot Trigger a Recession: Risk Assets Have Not yet Understood.”

According to the report, the Federal Reserve’s increase in interest rates goes against common belief, but instead boosts the economy in unexpected ways. Goyal explains these mechanisms in detail:

1. Increased Government Interest Payments: “Rate hikes raised interest payments by the government to the private sector,” Goyal notes. As the Fed raises rates, it increases the interest burden on the government, which has borrowed extensively during the post-COVID period. With the federal debt-to-GDP ratio exceeding 120%, the doubled interest payments now effectively act as a stimulus, channeling approximately $1 trillion annually to the private sector

2. Direct Subsidy to Banks: The Federal Reserve’s modifications in policy have resulted in a shift of wealth within the financial realm. According to Goyal, these rate hikes have caused the Fed to provide a more significant, direct subsidy to the banking sector. This has transpired as a result of the yield curve inversion causing losses on the Fed’s balance sheet. These losses, in turn, have been advantageous to banks, amounting to an approximate $150 billion annual subsidy.

3. Surprisingly Robust Housing Construction: Despite increased interest rates, there has been an unexpected surge in housing construction. As reported by Goyal, “Higher interest rates have fueled a surprising increase in new housing construction.” With fewer existing homes being sold due to the higher rates, building new properties becomes the most effective solution for addressing the housing market demand, which carries a significant impact on the country’s economic growth.

Goyal’s observations highlight a significant discrepancy between the Fed’s present monetary strategy and the background of extensive fiscal actions since the pandemic. In simpler terms, Goyal argues that the standard monetary policy model is collapsing under the influence of fiscal control. Consequently, he proposes a scenario where non-conventional assets like Bitcoin might thrive due to their unique attributes.

In line with Goyal’s discoveries, crypto analyst Will Clemente explained on X (previously Twitter) the significant consequences for cryptocurrencies, remarking, “Given the massive debt-to-GDP ratio, we live in an unusual situation where high interest rates act as subsidies for individuals purchasing assets. Approximately $1 trillion is set to be distributed in 2024 through these interest payments. From a broad perspective, this trend bodes well for internet coins.”

At press time, BTC traded at $61,173.

No Fed Rate Cuts? No Worries For Bitcoin, Says Research Firm

Read More

2024-04-18 10:52