Fed Rate Cuts: What Do They Mean for Bitcoin in TradFi World?

• Revised Expectations on US Federal Reserve Rates
• Market Response to Federal Reserve's Decision
• Probability of Federal Reserve Rate Cuts
• Impact on Bitcoin
• Are Market Participants Getting Ahead of Themselves?

Revised Expectations on US Federal Reserve Rates

The dots published on Wednesday in the context of the U.S. Federal Reserve's political decision indicate that central bankers expect 75 basis points of rate cuts in 2024. This is a significant increase from the mere 25 basis points anticipated by policymakers three months ago.

Market Response to Federal Reserve's Decision

Traditional markets, already in strong recovery since October due to expectations of a more accommodating monetary policy, surged further on the news. All three major US stock indices increased by more than 1%, with the Dow Jones Industrial Average surpassing the 37,000 mark for the first time ever. Stocks continued to rise on Thursday, albeit more modestly.

In addition, the market rally has been even greater for bonds, with the yield on two-year U.S. Treasury bonds collapsing by about 40 basis points since the news hit 4.32%, the lowest level since May. With the current federal funds rate, or overnight lending rate, between 5.25% and 5.5%, the two-year money at 4.32% shows a strong belief that significant rate cuts will arrive soon.

Probability of Federal Reserve Rate Cuts

Indeed, the CME's FedWatch tool now shows a 21% chance of a Federal Reserve rate cut of 25 basis points as soon as January and an 84% chance of one or more rate cuts by March.

Exploring other rate-sensitive markets, the US dollar index is down about 2% from the Federal Reserve's news on Wednesday, and gold has recorded a 2.5% rally. Both figures further suggest that Traditional Finance (TradFi) is fully accepting the rate cut narrative for now.

Impact on Bitcoin

The Federal Reserve's accommodating signal also bolstered the price of Bitcoin$42,260 -0.64%, which has been struggling to recover from the flash crash on Sunday evening that saw prices plunge more than 5% in just a few minutes. At $43,200 at the time of writing, Bitcoin is now only about 1% lower than its pre-crash price.

Are Market Participants Getting Ahead of Themselves?

While the Federal Reserve's median forecast is for 75 basis points of rate cuts in 2024, markets have discounted nearly 150 basis points. Needless to say, even if the Federal Reserve's more modest expectations were realized, a substantial slowdown in the economy and/or inflation would be required.

There have been prominent speculations about an impending recession this year, but the data continues to tell a different story. The annualized growth of the gross domestic product in the third quarter was a massive 5.2%, the fastest pace since the fourth quarter of 2021.

Regarding inflation, while it has significantly mitigated from near-double-digit levels in 2022, standing at 3.1% based on the latest Consumer Price Index (CPI), it remains well above the Federal Reserve's 2% target. The core inflation rate, which typically attracts more attention from central bank policymakers, has been more stubborn to decline, and remained at 4% in the most recent report.

Edited by Jonathan Stoker