Jerome Powell’s column heralded a dull summer for Bitcoin
Just a few months ago, most economists expected the Federal Reserve to begin rate cuts in May. All signs point to this: the fight against inflation appears to be coming to an end, jobs data promises a cooler labor market on the horizon and consumer confidence begins to decline.
Fast forward to May's Federal Open Market Committee (FOMC) meeting, however, and expectations for a rate cut in the first half of 2024 are fading fast. Indeed, the Fed looks set to hold rates higher than anyone could have imagined in January. Some market analysts think we are stuck with the “long-term” until 2025, despite the pressure of the upcoming presidential election.
Whether rates hold until September or next January, May's FOMC meeting was certainly a far cry from December 2023, when Fed Chairman Jerome Powell first hinted at a rate cut, sending markets into a frenzy. Now, we're looking at an even more hawkish committee on monetary policy in the face of stubborn inflation and a labor market that refuses to budge.
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But while it's discouraging for riskier assets like stocks and cryptocurrencies, the Fed's stance shouldn't come as a surprise to anyone who follows economic data. The Fed's preferred measure of inflation – the PCE index – rose to 2.7% in April from 2.5% in February. The CPI index remained the same, rising again from 3.2% in February to 3.5% in March.
As this spread increases, consumers choose to take on more debt rather than tighten their belts. Indeed, the U.S. savings rate fell steadily from 4.1 percent in January to 3.2 percent in March, while household debt levels are hitting previous records. On top of that, unemployment did not go to a high level. The unemployment rate fell from 3.9% in February to 3.8% in March, which is at historic lows.
Although the economy has started to slow down – first quarter GDP growth surprised dramatically, coming in at 1.6% against expectations of 2.4% – we are still a long way from an economic recession that will trigger a stimulus in the form. Speed reductions. Indeed, Powell has always been clear that the Fed's monetary policy decisions are driven by data and data alone. And the data simply don't support a lax position.
As expected, the markets are taking this disappointment seriously. In the week before the FOMC meeting, Bitcoin (BTC) hovered between $60,000 and $65,000, and the hawkish pole of global stock markets was bought as expected. In contrast, the dollar strengthened, beating other global currencies such as the yen, which fell to its lowest level against the dollar since 1990. Other emerging market funds are expected to follow.
And the bad news is that we're stuck with this image for a few months. This makes a massive crash to a new all-time high for those who expected Bitcoin to halve. After some price action in recent months, no one is ready for another extended sideways trade. It's similar to the lights that go on in a nightclub when the party is just getting started.
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As long as the Fed rates, however, Bitcoin remains in a tight range — below $70,000 — barring major risks that could trigger a flight to safety. So far this year, Bitcoin hasn't given a damn about the macro economy — barring the last few inflation announcements. But the Fed's position will have a more profound effect. The reality is that BTC is now deeply embedded in traditional financial markets, thanks to spot ETFs, so it can mimic the behavior of other risk assets until rates start to fall.
So, thanks to Jerome Powell, we're in for a boring summer that will really test investors' patience. That doesn't mean there won't be another Bitcoin party – it's coming, and it'll probably rival or even surpass what we've seen this year. In the long run, the Bitcoin investment thesis remains intact. Indeed, while Powell's renewed hawkishness is keeping the US dollar down for now, it's only a matter of time until the Fed finally pulls the plug, leading to renewed dollar weakness.
Once the greenback begins its slide, Bitcoin will become a safe haven from a currency crash. Then, US spot BTC ETFs really come into their own, and those who hold onto their assets and wait out the drought will be rewarded. Until then, it might not be a bad idea to leave investment portfolios alone and enjoy the summer.
Lucas Kiely is the Chief Investment Officer of the Product Application, where he oversees investment portfolio allocation and leads the expansion of the diversified investment product range. He was previously Chief Investment Officer at Diginex Asset Management, and was Senior Trader and Managing Director, QIS and managed the structured derivatives business at Credit Suisse in Hong Kong. He was Head of Special Derivatives at UBS in Australia.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
