No Rate Cuts in Sight: Is the Fed's Stance on Inflation Targeting Bad News for Bitcoin?
Digital Asset Market: The current state of the financial market is precarious, as risk assets such as stocks and cryptocurrencies are on the brink of a tipping point. Geopolitical tensions, persistent inflation rates, and rising bond yields are all contributing factors to this bearish sentiment. However, these same factors may also drive a potential surge in the value of Bitcoin despite its recent 10% decline. The narrative of Bitcoin as a safe haven asset in times of geopolitical turmoil remains strong, and the upcoming halving event is also expected to impact its value positively. Nevertheless, recent tensions between Iran and Israel, coupled with a decrease in investments towards Bitcoin exchange-traded funds, have caused a short-term decline in the market. It remains to be seen which direction the market will take in the coming weeks.
On the stablecoin side, the two major digital dollar tycoons are disagreeing on how to address the patchy stablecoin rules worldwide. Circle advocates for the U.S. government to provide guidance, while Tether seeks to fight fraud and money laundering firsthand. Circle criticizes the U.S. lawmakers' inaction, while Tether focuses on developing nations. Both companies have had their struggles, with Tether facing scrutiny over the integrity of its stablecoin and Circle dealing with complications from the collapse of Silicon Valley Bank.
Macro Economics: The International Monetary Fund (IMF) has expressed concerns over US policymakers' unsustainable fiscal policies, which have propelled the country's strong economic performance but pose risks of inflation and financial instability. Despite these challenges, the IMF has raised its global growth forecast, noting that the global economy remains surprisingly resilient amid inflationary pressures and policy shifts. The IMF expects global growth of 3.2% in 2024 and 2025, with advanced economies leading the way while China and other large emerging market economies may weigh down global growth. The IMF also highlights potential downside risks, such as geopolitical concerns and trade tensions, and encourages central banks to focus on controlling inflation while implementing medium-term fiscal consolidation. However, global growth remains low compared to historical levels due to weak productivity growth and increasing political division.Â
Equities: The S&P 500 and Nasdaq Composite edged lower on Tuesday as investors weighed corporate earnings against concerns over yields and geopolitical tensions. The Dow Jones Industrial Average rose slightly, led by a strong performance from UnitedHealth, which beat expectations in the first quarter. Morgan Stanley also beat forecasts, while Bank of America's results disappointed investors. Despite strong earnings from many companies, rising interest rates remained a concern for the market. The CBOE Volatility Index, a measure of fear in the market, remained elevated due to escalating tensions in the Middle East. The Dow snapped a six-day losing streak, but is at risk of its longest period of continuous losses since February 2020. Federal Reserve Chair Jerome Powell is set to speak, and investors will be watching for any insights on the central bank's monetary policy.
The Fed and US Treasury: Inflation remains a major concern for investors, consumers, and policymakers as the latest data shows continued high prices. Despite hopes for an accommodative Fed and expectations of rate cuts, stubborn inflation has forced markets to recalibrate and add to ongoing volatility. Furthermore, Fed officials have taken note of the high readings but still anticipate cutting rates later this year. However, the PCE index, which they closely follow, has not been released for March yet, and other indicators show that the Fed still has a long way to go in reaching its goal of 2% inflation. Some economists suggest that the Fed should potentially reconsider its commitment to 2% inflation and instead aim for something closer to 2.8%-3% to balance various economic risks, and "call it a day and a win".
Geopolitical: The US and Biden administration hope that Israel will respond to the recent attack from Iran with limited strikes on Iranian proxies and not a full-scale attack on Iran itself. However, the Israeli government is planning a significant response to the recent response launched from Iran, with the support of their Western allies. The Biden administration clearly wants to de-escalate and not get involved in a war with Iran, and is hoping to be given a warning of the Israeli plans to protect their personnel in the region, but there is no guarantee. If there is no Israeli response, the US believes there will be de-escalation, but any further moves could escalate the situation taking it into new and unknown scenarios. Meanwhile, there are claims that the US has signaled Iran to allow a symbolic Israeli strike in order to return to the previous status quo. However, Iran has warned of a quick and strong response if Israel does retaliate. This evolving situation remains under close market scrutiny due to its potential global impact.
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The persistent uncertainty in the geopolitical landscape and the economy, alongside stubborn inflation, has adversely affected cryptocurrencies, with Bitcoin falling to the current range of $61,000. Some analysts argue that this heightened risk justifies predictions of Bitcoin reaching $120K. However, we contend that, in the short term, Bitcoin and other cryptocurrencies are significantly influenced by economic conditions. The surge in Bitcoin to over $70K was fueled by ETF issuances; thus, any economic hardships that impact investors could lead to a decline in ETF inflows, or even a reversal, aligning cryptocurrencies more closely with equities as risk assets.
For some time, we have been skeptical about the likelihood of a rate cut in June, and this perspective is now widely accepted in the broader market. Current tensions in the Middle East, while significant, do not appear to be escalating to a level that would prompt the Federal Reserve to initiate monetary easing sooner. This context reinforces our extended outlook, suggesting that rate cuts this year are increasingly improbable unless the Federal Reserve decides to adjust its inflation target closer to 3%—a move we believe is unlikely.
Given these conditions, the realistic scenario for the foreseeable future involves no rate cuts within the year. This assessment is based on the Federal Reserve's likely stance on maintaining its current inflation target, coupled with ongoing economic pressures and geopolitical issues. As such, investors should prepare for continued volatility in both traditional and cryptocurrency markets, reflecting the interconnectedness of global economic policies and investor sentiment.
For those interested in the full report, it’s worth a quick read: Jamie Dimon’s Letter to Shareholders
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