Just a few months ago, economists were anticipating that the Federal Reserve would begin cutting interest rates by May. All the signs seemed to point in that direction: the battle against inflation seemed to be coming to a close, jobs data indicated a cooling labor market, and consumer confidence was waning.
However, at the May Federal Open Market Committee (FOMC) meeting, hopes of a rate cut in the first half of 2024 quickly faded. It now appears that the Fed will keep rates unchanged for much longer than anyone had anticipated earlier this year. Some market commentators even believe that rates will remain higher until 2025, despite the upcoming presidential election.
Whether rates stay the same until September or next January, the May FOMC meeting was a far cry from December 2023, when Fed Chairman Jerome Powell first mentioned rate cuts, causing the markets to react dramatically. Now, we are seeing a more hawkish committee, determined to maintain a restrictive monetary policy stance in the face of stubborn inflation and a resilient labor market.
Although the Fed’s stance is disappointing for risk assets like stocks and cryptocurrencies, it shouldn’t come as a surprise to those who closely follow economic data. The Fed’s preferred inflation gauge, the PCE index, rose to 2.7% in April from 2.5% in February. Similarly, the CPI index has remained stubbornly high, increasing from 3.2% in February to 3.5% in March.
This inflationary pressure has been fueled by excessive spending, as consumers choose to take on more debt rather than tighten their belts. In fact, the U.S. savings rate has continuously declined from 4.1% in January to just 3.2% in March, while household debt levels keep reaching new records. Additionally, unemployment has remained low, with the jobless rate falling from 3.9% in February to 3.8% in March.
Even though the economy is beginning to slow down, with first-quarter GDP growth coming in at 1.6% compared to expectations of 2.4%, we are still far from the economic slowdown that would necessitate rate cuts. Powell has always been clear that the Fed’s monetary policy decisions will be based solely on data, and the current data does not support a looser stance.
As expected, the markets have reacted poorly to this disappointment. Bitcoin, for example, hovered between $60,000 and $65,000 in the week leading up to the FOMC meeting, and global stock markets were subdued as expectations of a more hawkish approach grew. On the other hand, the dollar strengthened, putting pressure on other global currencies like the yen, which fell to its lowest level against the dollar since 1990. Other emerging market currencies may also face similar challenges.
Unfortunately, we are likely to be stuck in this situation for several more months. This is a letdown for those who were expecting the Bitcoin halving to trigger a bullish breakout to new all-time highs. After months of volatile price action, no one is prepared for another extended period of sideways trading.
As long as the Fed keeps interest rates steady, Bitcoin is likely to trade within a narrow range below $70,000, unless a major global crisis prompts a flight to safety. So far this year, Bitcoin has not been significantly impacted by macroeconomic factors, shrugging off recent inflation announcements. However, the Fed’s stance will have a more profound effect. BTC is now deeply integrated into traditional financial markets through spot ETFs, so it will likely follow the behavior of other risk assets until rates start to decline.
Thanks to Jerome Powell, we can expect a boring summer that will test investors’ patience. However, this does not mean that there won’t be another Bitcoin rally. It is coming, and it may even surpass what we have already witnessed this year. In the long run, the investment thesis for Bitcoin remains intact. While Powell’s hawkishness is currently boosting the U.S. dollar, it is only a matter of time before the Fed reverses course, leading to a weaker dollar.
Once the greenback starts to decline, Bitcoin will serve as a refuge from currency devaluation. At that point, U.S. spot BTC ETFs will truly shine, and those who hold onto their assets and wait patiently will be rewarded. Until then, it might be a good idea to leave investment portfolios untouched and enjoy the summer.
Lucas Kiely is the chief investment officer for Yield App, responsible for investment portfolio allocations and expanding the range of diversified investment products. He previously held positions as chief investment officer at Diginex Asset Management and senior trader and managing director at Credit Suisse in Hong Kong. He also served as the head of exotic derivatives at UBS in Australia.
This article is for informational purposes only and should not be considered as legal or investment advice. The views, thoughts, and opinions expressed in this article belong solely to the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.