Powell unexpectedly sings dove, expectations of interest rate cuts increase, Bitcoin breaks through $43,000 in the short term.

Powell Surprises with Dovish Tone, Sparking Speculation of Interest Rate Reduction; Bitcoin Soars Past $43,000 in Near Future

Author: LianGuaiBitpushNews Mary Liu

On the afternoon of December 13th, Eastern Time, the Federal Reserve maintained interest rates in the current range of 5.25%-5.50% as scheduled. This marks the fourth time this year that the Federal Reserve has paused rate hikes after maintaining rates in November, September, and June.

What is even more unexpected is that the Federal Reserve has issued its clearest signal to date, predicting a series of interest rate cuts next year that exceed economists’ expectations. The Federal Reserve currently expects the federal funds rate to be only 4.6% at the end of 2024, compared to 5.1% three months ago. This means that there will be three rate cuts of 0.25 percentage points next year.

After this news was announced, Bitcoin rebounded to over $43,000, with a 24-hour increase of over 4%, but it has not yet returned to the annual high of over $44,300 in early December. The current global cryptocurrency market value is $1.65 trillion, showing a growth of 3.6% in the past 24 hours. Shitcoins like Avalanche (AVAX), Cardano (ADA), and Injective (INJ) have seen a close to 10% increase.

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In addition to the interest rate announcement, the Federal Reserve also released its quarterly updated economic forecasts. The central bank currently expects the core inflation rate in 2023 to be 3.2%, compared to a previous expectation of 3.7% three months ago. The final growth rate for 2024 is now expected to be 2.4%, compared to a previous expectation of 2.6%. The actual GDP growth rate for 2024 has been lowered from 1.5% to 1.4%.

Powell’s Dovish Turn

Federal Reserve Chairman Jerome Powell’s remarks at the press conference shocked economists, as he gave the clearest signal to date that monetary policy tightening has ended and rate cuts are “now within consideration”. Industry insiders believe that this press conference was more dovish than expected.

Powell said, “We see strong growth apparently slowing. We see labor markets balancing, and we see real progress in inflation. These are all things we’ve been wanting to see.”

Michael Feroli, an economist at JPMorgan Chase, said that it was like “12 doves jumping”.

NewEdge Wealth, an asset management company, stated on the X platform, “Just 12 days ago, Powell postponed rate cut speculation, and now he reveals that the FOMC is openly discussing future loose policies. Therefore, today’s meeting is a real turning point for the Federal Reserve, which has significant implications for the financial situation.”

Federal Reserve Decision and the Cryptocurrency Market

The Federal Reserve’s interest rate decision directly affects the cryptocurrency market as it can impact investor behavior. When the Fed raises rates, traditional investment assets such as bonds and other fixed-income assets become more attractive to investors due to stable returns. Consequently, investors may shift funds away from volatile assets like cryptocurrencies, reducing demand and potentially leading to price adjustments or declines.

Once interest rates decrease, the market’s risk appetite strengthens, and funds begin flowing back into stocks and cryptocurrency markets from less volatile asset classes.

Due to escalating inflation, the Federal Reserve began tightening rates in March 2022, raising rates from the low range of 0% to 0.25%, with the most recent hike occurring in July.

US Treasury yields, particularly securities with maturities of 2 to 7 years, have declined by over 15 basis points. These changes suggest that monetary policy may become more accommodative, implying a favorable environment for the growth of risky assets like Bitcoin.

Currently, rate futures indicate over a 60% probability of a rate cut by March 2024. This probability has significantly increased, with rate cut expectations in May soaring to 90%.

Bitfinex analysts state, “Historically, maintaining or lowering interest rates tends to bring optimism to investors as it signifies more disposable income and potential larger investments across various asset classes. This impact is not limited to traditional markets but also extends to new types of assets like cryptocurrencies.”

ETFs and Halving as Catalysts

With expectations of a rate cut in 2024, upcoming ETF approvals, and the Bitcoin halving event in April, there seems to be strong potential driving Bitcoin’s price surge.

Earlier reports from LianGuai revealed that several major financial companies, including BlackRock (BLK.N), have submitted applications to the SEC for the launch of Bitcoin ETFs, which, if approved, could attract significant institutional capital inflows into cryptocurrencies. US crypto firm NYDIG estimates a demand of around $30 billion for a spot Bitcoin ETF. Their calculations compared the sizes of gold and Bitcoin ETFs (which are $210 billion and $28.8 billion, respectively) and adjusted them based on their relative volatility.

The next Bitcoin halving is expected to take place in April next year. This process aims to slow down the issuance speed of Bitcoin, with the supply cap set at 21 million, of which 19 million have already been mined.

CoinShares analyst Butterfill states that Bitcoin experienced rebounds in the previous three halving events, with the most recent one being in 2020. However, considering different market conditions, it is currently unclear whether this halving will trigger a rebound again. He says, “If we combine it with high demand for US ETFs and reduce the new supply, it could have an impact, but I would remain cautiously optimistic.”

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