Federal Rate Cuts: Implications for Bitcoin as TradFi Dives In

• U.S. Federal Reserve's Policy Shifts Market Expectations
• Market Reactions to the Federal Reserve's Announcement
• Impact on the Bond Market
• Effects on Other Rate-Sensitive Markets
• Are Market Responses Premature?

U.S. Federal Reserve's Policy Shifts Market Expectations

The recent release from the U.S. Federal Reserve has suggested the possibility of a 75 basis points rate cut in 2024. This marks a significant shift from the prior 25 basis points cut that was anticipated three months ago.

Market Reactions to the Federal Reserve's Announcement

In response to these new projections and the seemingly drift towards more accommodative monetary policy, traditional markets have seen a significant surge. The three key U.S. stock indexes increased over 1%, and the Dow Jones Industrial Average broke the 37,000 mark for the first time. These markets continued to rise, although at a more muted rate, on Thursday.

Impact on the Bond Market

The bond market rally has been even more remarkable, with the two-year U.S. Treasury yield dropping approximately 40 basis points to 4.32%, a low point not seen since May. This yield reduction indicates a strong market belief in impending notable rate cuts.

The CME FedWatch tool currently suggests a 21% possibility of a 25 basis points Federal Reserve rate cut as early as January, growing to an 84% chance of one or more rate cuts by March.

Effects on Other Rate-Sensitive Markets

Other markets sensitive to rates have also reacted to the Federal Reserve's announcement. The U.S. dollar index fell by around 2% since Wednesday, and gold rallied with a 2.5% gain, supporting the belief that traditional finance (TradFi) is aligning with the rate cut narrative.

In the digital asset sphere, Bitcoin$42,260 -0.64% (BTC) saw a price uplift following the Federal Reserve's announcement. This comes after a recent flash crash, where the digital currency value fell more than 5% within a few minutes. The recovery has brought Bitcoin close to its pre-crash price, sitting at $43,200 at last check.

Are Market Responses Premature?

Though the Federal Reserve's median projection for 2024 is a 75 basis points rate cut, markets have already priced in almost 150 basis points. This substantial expectation would necessitate significant economic slowdown and/or inflation to materialize.

Recession predictions have been prevalent this year, but recent data contradicts these claims. The annualized gross domestic product growth in the third quarter was an impressive 5.2%, the most rapid since the fourth quarter of 2021, when there was a considerable influx of government Covid stimulus into the economy. Further, recent reports show a significant decrease in weekly initial jobless claims and an unexpected retail sales increase for November.

However, inflation remains a concern. Although it has significantly receded from the near double-digit levels in 2022, the latest Consumer Price Index (CPI) still reports inflation at 3.1%, exceeding the Federal Reserve's 2% target. The core inflation rate, which typically attracts more attention from central bank policymakers, remains at a stubborn 4%.

Edited by Jonathan Stoker