As the U.S. economy struggles with rising inflation expectations and scaled-back forecasts for rate cuts by the Federal Reserve, the Bitcoin market remains buoyant, according to a detailed analysis from Reflexivity Research. With US CPI inflation expected to accelerate to 4.8% by the November 2024 election, conditions appear seemingly unfavorable for monetary policy easing, according to Bank of America. Despite this, the cryptocurrency sector, especially Bitcoin, seems isolated and optimistic.
Bitcoin unfazed by delayed interest rate cuts?
The bond market now expects just three rate cuts from the Federal Reserve this year, down significantly from the previous forecast of six. CME’s FedWatch tool shows that the majority of market participants do not expect a rate cut to occur before the mid-September FOMC meeting. This adjustment reflects a recalibration of expectations regarding the Fed’s ability to manage persistent inflationary pressures.
In the midst of these macroeconomic shifts, Ritik Goyal is our guest after for Reflexivity Research, presents a compelling analysis in its report entitled “The Fed Cannot Cause a Recession. Risk assets have yet to realize this.”
The report states that, contrary to conventional wisdom, the Federal Reserve’s rate hikes have had unintended stimulative effects on the economy. Goyal explains three specific mechanisms through which this phenomenon works:
1. Increased interest payments by the government: “Interest rate hikes increased the government’s interest payments to the private sector,” Goyal notes. As the Fed raises rates, it increases the interest burden on the government, which has borrowed extensively in the post-COVID period. With the federal debt-to-GDP ratio exceeding 120%, the doubled interest payments now effectively act as a stimulus, funneling about $1 trillion annually to the private sector.
2. Direct subsidy to the banking system: The Fed’s policy adjustments have also led to a redistribution of wealth within the financial system. “Interest rate hikes have increased the Fed’s direct subsidy to the banking system,” Goyal says. This happened when the inversion of the yield curve caused the Fed to incur losses on its balance sheet, losses that directly benefit the banking sector, translating into an annual subsidy of an estimated $150 billion.
3. Induced housing boom: The interest rate increases have paradoxically stimulated the housing market. “Rate increases led to a housing boom,” Goyal said. With higher rates deterring existing homeowners from selling, new construction is the only viable option to meet housing demand, a sector with one of the highest GDP multipliers.
Goyal’s insights underscore a critical misalignment in the Fed’s current approach against the backdrop of substantial fiscal interventions since the pandemic. “The traditional monetary policy framework is buckling under the weight of fiscal dominance,” Goyal concludes, suggesting an environment that could favor non-traditional assets like Bitcoin.
Echoing Goyal’s findings, says crypto expert Will Clemente marked the broader implications for cryptocurrencies on buying assets – ~ $1 trillion will be paid out by 2024. The big picture is very constructive for the internet coins.”
At the time of writing, BTC was trading at $61,173.
Featured image from Shutterstock, chart from TradingView.com
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