Embracing Fed Rate Cuts: TradFi’s Big Bet, Impact On Bitcoin Unveiled

The recent release of the ‘dots’ in the U.S. Federal Reserve’s policy decision indicates a projection of 75 basis points in rate cuts for 2024, a significant increase from the previously expected 25 basis points by policymakers three months ago.

Fed’s dovish shift ignited a market frenzy, sending stocks soaring. The Dow Jones soared past 37,000 for the first time ever, while other major indexes followed suit. The rally continued on Thursday, though with slightly less intensity.

The bond market roars, sending two-year Treasury yields tumbling 40 basis points to 4.32%, their lowest level since May. This plunge reflects a strong belief in near-term rate cuts, with the current fed funds rate significantly higher at 5.25% to 5.5%.

The CME FedWatch tool, a popular gauge of market expectations for Fed policy, now indicates a 21% chance of a quarter-point rate cut as early as January, while the probability of one or more cuts by March stands at a whopping 84%.

Observing other rate-influenced markets, the U.S. dollar index declined around 2% post-Fed news, while gold surged 2.5%. These movements indicate a strong buy-in from traditional finance (TradFi) into the rate reduction narrative.

The Federal Reserve’s dovish stance also lifted bitcoin’s price, aiding its recovery from the recent ‘flash crash.’ Despite the crash dropping prices over 5% in minutes last Sunday, bitcoin, at $43,200 currently, sits just 1% below its pre-crash value.

Are Market Participants Being Overly Proactive?

While the Fed anticipates 75 basis points of rate cuts in 2024, the market expects nearly double that, at 150 basis points. This gap reflects contrasting views on the pace of economic and inflationary deceleration needed for the Fed’s forecast to become reality.

Despite prevalent talks of an impending recession this year, the data paints a different picture. Third-quarter annualized gross domestic product (GDP) surged by 5.2%, marking the fastest growth since late 2021. Recent updates bring more positive news, including a significant drop in weekly initial jobless claims, hitting a two-month low, and an unexpected boost in November’s retail sales.

Inflation has notably decreased from nearly double digits in 2022, resting at 3.1% according to the latest Consumer Price Index (CPI). This figure, surpassing the Fed’s 2% target, persists. The core inflation rate, receiving heightened focus from central bank officials, remains steadfast at 4% in the recent report, showing slower decline.

* We hope this information will help you in your investment process, but this is not investment advice. Every investment carries risk, especially in this industry, so DYOR before making a decision.