TradFi Bet on Fed Rate Cuts: Implications for Bitcoin

• US Federal Reserve Predicts Significant Rate Cuts in 2024
• Impact on Traditional Markets
• Fed's accommodative stance boosts Bitcoin prices
• Bond Market Rally and Yield Drops
• Probability of Rate Cuts
• Market Reactions
• Are Market Players Getting Ahead?
• Economic Outlook
• Inflation Update

US Federal Reserve Predicts Significant Rate Cuts in 2024

The dots released by the US Federal Reserve on Wednesday indicate that central bankers anticipate rate reductions of 75 basis points by 2024. This is a substantial increase from the 25 basis points previously expected by policymakers three months ago.

Impact on Traditional Markets

Following the news, traditional markets, which have been on a steady rise since October due to expectations of a more relaxed monetary policy, saw a further increase. The three main US stock indices experienced a hike of over 1%, and the Dow Jones Industrial Average surpassed 37,000 for the first time ever.

Fed's accommodative stance boosts Bitcoin prices

The Fed's dovish signal also boosted Bitcoin$42,260 -0.64% prices as it attempts to recover from last Sunday's flash crash, which saw prices fall more than 5% within minutes.

Bond Market Rally and Yield Drops

The bond market rally has been even more significant, with the yield on two-year US Treasury bonds falling about 40 basis points since the news, hitting 4.32%, its lowest level since May.

Probability of Rate Cuts

The CME FedWatch tool now indicates a 21% chance of a Fed rate cut of 25 basis points as early as January and an 84% chance of one or more rate cuts by March.

Market Reactions

Since the Fed's news on Wednesday, the US dollar index has dropped about 2%, and gold has increased by 2.5%, suggesting that TradFi is fully embracing the rate cut narrative for now.

Are Market Players Getting Ahead?

While the Fed's median forecast predicts a rate cut of 75 basis points in 2024, markets have priced in nearly 150 basis points. It goes without saying that even for the Fed's most modest expectations to materialize, a substantial slowdown in the economy and/or inflation would be required.

Economic Outlook

Despite claims of an impending recession, the data continue to suggest otherwise. Third-quarter annualized GDP growth was at 5.2%, the fastest pace since Q4 2021, when significant Covid-related government stimulus measures were still impacting the economy. Furthermore, initial weekly unemployment claims dropped to a two-month low, and an unexpected rise in retail sales was reported for November.

Inflation Update

In terms of inflation, although it has significantly eased from the near two-digit levels in 2022, it remains well above the Fed's 2% target at 3.1%, according to the latest Consumer Price Index (CPI).

Edited by Jonathan Stoker