TradFi, Fed Rate Cuts, and the Implications for Bitcoin

• Federal Reserve's Decision Impact on U.S. Economy and Crypto Market
• Impact on Traditional Markets
• Federal Reserve's Indication Towards a Calmer 2024
• Tools Indicating Likely Rate Cuts
• Effects on Other Rate-Sensitive Markets
• Bitcoin's Recovery
• Are Market Participants Jumping the Gun?
• Recession Claims Versus Data
• Inflation Concerns

Federal Reserve's Decision Impact on U.S. Economy and Crypto Market

On Wednesday, the Federal Reserve's so-called 'dot' as part of its policy decision, hinted at an expectation of a 75 basis point cut in rates by 2024. This is a substantial increase from the mere 25 basis point cut anticipated by policy-makers three months earlier.

Impact on Traditional Markets

Traditional markets, already on a strong recovery track since October, experienced an even greater surge following this news. The three major U.S. stock indices skyrocketed by more than 1%, with the Dow Jones Industrial Average reaching 37,000 for the first time. Stocks continued to rise on Thursday, albeit at a slower pace.

Federal Reserve's Indication Towards a Calmer 2024

The rally in the BOND market was more pronounced, with the yield on two-year U.S. Treasury bonds dropping approximately 40 basis points since the news, hitting 4.32%, its lowest level since May. With the current federal funds rate, or overnight lending rate, between 5.25% and 5.5%, the 4.32% two-year yield indicates strong belief in imminent significant rate cuts.

Tools Indicating Likely Rate Cuts

In fact, the CME FedWatch tool is now showing a 21% chance of a 25 basis point rate cut by the Fed as early as January, and an 84% probability of one or more rate cuts by March.

Effects on Other Rate-Sensitive Markets

Upon observing other rate-sensitive markets, the American dollar index has dropped approximately 2% since Wednesday's Fed news, while gold surged 2.5%. Both suggest that for now, Traditional Finance (TradFi) is entirely convinced of the rate cut narrative.

Bitcoin's Recovery

The Fed's dovish signal also invigorated the price of Bitcoin$42,260 -0.64% [BTC], which has been attempting to recover from Sunday night's flash crash, which saw prices plummet more than 5% within minutes. Trading at $43,200 at the time of this overview, Bitcoin is now only about 1% lower than its price prior to the crash.

Are Market Participants Jumping the Gun?

Despite the median Fed forecast of 75 basis point rate cuts in 2024, markets have priced in almost 150 basis points. Needless to say, even for the Fed's more modest expectations to materialize, a significant slowdown in the economy and/or inflation would be required.

Recession Claims Versus Data

Claims of an imminent recession have been popular this year, yet the data continues to tell a different story. The annualized growth of the Gross Domestic Product in the third quarter was a whopping 5.2% - the fastest pace since the fourth quarter of 2021 when substantial Covid governmental stimulus was still being infused into the economy. Furthermore, more encouraging news surfaced this morning, with a significant decrease in initial weekly unemployment claims to their lowest level in two months and an unexpected uptick in retail sales in November.

Inflation Concerns

As for inflation, although it has significantly decreased from NEAR double-digit levels in 2022 to 3.1% based on the most recent Consumer Price Index (CPI), it remains well above the Fed's 2% target. The core inflation rate - usually of greater interest to central bank policy-makers - has been more stubbornly resistant to decrease and stayed at 4% in the latest report.

Edited by Jonathan Stoker