After the not very encouraging data released yesterday, concerning inflation in March 2024 in the USA, expectations for a Fed rate cut in the short term literally collapsed: Bitcoin reacts.
According to analysts at the quantitative trading company Pythagoras, what happened yesterday suggests that current prices of risk-on assets like Bitcoin are only factoring in two interest rate cuts by the Fed by the end of the year, instead of the expected three.
The fact is that internal sources within the Fed itself had hypothesized that there could be three rate cuts in 2024, with markets even a few months ago appearing to be even more optimistic, predicting five or six cuts.
Instead, yesterday’s data not only changed the markets’ minds, but perhaps made them even more pessimistic than the Fed.
Summary
The odds of rate cuts and Bitcoin price reaction
Until the day before yesterday on the CME FedWatch Tool a probability greater than 50% of a first rate cut in June was given.
In April there will be no decision from the Fed, and now it almost seems certain that in May it will choose to keep them stable.
After yesterday’s news, however, the chances of a first rate cut in June have plummeted to less than 20%, clearly indicating that the markets expect the Fed to leave them unchanged.
Actually, the chances of the Fed starting to cut rates in July have even dropped to 40%, so the hypothesis circulating in the markets is that the first cut may only happen in September, since the Fed will not make any decisions in August.
Even President Joe Biden himself has stated that he believes a delay in the start of rate cuts is likely at this point, although he remains convinced that the Fed will start cutting them by the end of the year.
Two or three expected cuts
Obviously there is still no news coming from the Fed about it, because as already mentioned several times they will take each decision one step at a time, without deciding in advance what to do in the following appointments.
So right now the US central bank is focusing only on the May decision, which however seems a foregone conclusion. It is possible that they have not even started discussing what they will do in June, July or September.
Furthermore, there is the elephant in the room: the presidential elections in November.
The hypothesis circulating is that the Fed is unlikely to cut rates before the elections, if this were to reduce the scope of the fight against inflation.
Inflation is indeed a factor that increases the weakness of the current president, who will be running for re-election in November, so it seems very unlikely that the Fed will start cutting rates before inflation decreases.
So if on one hand it can be imagined that in November and December, after the elections have already taken place, the Fed could actually cut rates, there is still a lot of uncertainty about the September decision (in October the Fed will not make any decision).
According to the CME FedWatch Tool, there is more than a 65% probability that the Fed will start cutting already in September, meaning that in the end the cuts in 2024 will be three as expected.
However, these predictions have often been proven wrong when it comes to decisions expected several months later.
It can therefore be said that the forecast that the Fed will not cut rates in May seems quite reliable, and that probably even the one that it will not cut rates in June should be considered plausible.
As for the forecasts for July and September, there is still too much uncertainty to consider them reliable.
The price of Bitcoin
The director of capital formation at Pythagoras Investments, Semir Gabeljic, pointed out that the 2% drop compared to Monday would show that the price of risk-on assets like Bitcoin is currently only discounting a couple of rate cuts by the end of 2024.
Their analysis reveals that the price of BTC ultimately showed strength in the face of the not-so-positive news regarding inflation in the USA, as a retracement to only $67,000 is considered quite contained. Furthermore, Bitcoin later returned above $70,000, canceling out all losses.
However, it may be that this rebound is due to another news, namely relatively few BTC liquidated yesterday by the Grayscale ETF (just over 2,200 compared to the 4,200 the day before).
The circulating hypothesis is that, despite everything, the demand for BTC is still quite high, perhaps thanks to the anticipation for the halving on April 20th.
Another hypothesis is that the price of Bitcoin is benefiting from the increase in US public debt.
Bitcoin would act as a hedge against the risk that US authorities decided to let inflation rise, especially before the elections.
It seems that part of the rise in inflation may be due to the increase in the public deficit in recent months, probably a propaganda maneuver aimed at making the US economy prosper in the short or very short term.
Although this hypothesis does not seem to be confirmed by evidence, the trend of the US economy, debt, and inflation suggests quite clearly that these are political maneuvers aimed at gaining more consensus from the current president.
Bitcoin, however, has proven to be good mainly for dealing with excessively expansive monetary policies up to now, while the current monetary policy of the Fed is decidedly restrictive.
