Traders believe US Federal Reserve (Fed) chairman Jerome Powell is 45% more likely to cut rates again sometime before June of this year. The reasons are many, but this week’s release of the Federal Reserve minutes from the January meeting will provide details. However, this could have an effect on Bitcoin.
This news may come as a surprise to many on the heels of new all-time highs for stocks. Traders drove the S&P500 up 4.6% thus far in February—the best since 2015.
However, Powell and the Fed believe that the economy is teetering on the brink of a potential recession. A rate cut would work to forestall that event, and bring the soaring economy to a ‘soft landing.’ Such a cut would likely occur before midyear.
Interest rates are the most basic tool at the disposal of the Fed to manage economic growth. Lowering interest rates makes borrowing cheaper, allowing greater amounts of liquidity to enter the marketplace.
Raising interest rates slows borrowing because of higher costs, and therefore constricts liquidity in the market. As liquidity reduces, the economy tends to slow, which is when we could see the change in Bitcoin.
However, while the economy has been on an upward tear for some time, the Fed sees weaknesses that cause concern. For example, unemployment claims increased this year, indicating weakness in job growth. Additionally, the coronavirus has created widespread fear and tightening on spending.
These events have led to a fear that the economy could contract. To maintain current growth and stability, a rate reduction could be in the works.
Regardless of how one views current liquidity issues, such a rate cut would likely send Bitcoin up. A rate cut would indicate economic weakness. Because Bitcoin is considered a ‘safe-haven’ asset, it would likely benefit from weakness in the overall economy.
Further, a rate cut and the resulting liquidity increases would also mean increases in inflation. Bitcoin is already seen as a hedge against inflation and therefore could receive a substantial price boost if the cut were to occur.