Bitcoin Hits $43,500 Ahead of Key Fed Meeting
Higher interest rates have stifled risk assets
By: André Beganski
January 30, 2024
Bitcoin’s price topped $43,500 on Tuesday, as investors braced for volatility following tomorrow’s Federal Open Market Committee and another likely rate pause.
The U.S. central bank is expected to hold interest rates steady, but market participants will be on the lookout for any comments that signal a potential path forward for the Fed and its fight against inflation.
The potential pace of rate cuts is crucial, Fundstrat’s Head of Digital Asset Strategy Sean Farrell wrote in a recent note. If the Fed holds firm on its stance that rate cuts aren’t likely until at least the second half of this year, it could bolster the dollar’s strength to Bitcoin’s disadvantage in the short term.
“We have seen the market reprice the timing of cuts over the past couple of weeks, which has put upward pressure on rates and the [US Dollar Index] and has been reflected in gold and BTC prices,” he wrote.
The acute risks we saw as potentially affecting liquidity-sensitive assets in the early part of this year were the repricing of rate cuts, potential volatility around coupon issuance from the Treasury, and timing issues around the RRP drain/cessation of QT. pic.twitter.com/6JROmitLX6
— Sean Farrell (@SeanMFarrell) January 28, 2024
The Fed raising interest rates from near zero in 2022 has created pockets of volatility that have dented the ascent of risk assets like equities and crypto as the payout on cash reserves and government debt has become relatively more attractive. Rate cuts, as a “hammer” to the dollar’s strength, would deliver a significant boost for risk assets, Farrell wrote.
Meanwhile, higher rates have progressively taken steam out of inflation. U.S. inflation surged to a 41-year high of 9.1% in June of 2022, but it has since slowed to 3.4% in the 12 months through December. The Fed’s target of 2% inflation appears attainable, but the question remains as to whether the Fed can tame inflation and achieve a so-called soft landing, too.
By raising interest rates, the U.S. central bank makes it more expensive for consumers and firms tomorrow, thus cooling inflation amid a slowdown in economic activity. But if the Fed raises interest rates too aggressively, restrictive monetary policy could tip the economy into a recession.
Futures traders are growing less confident about the prospect of rate cuts in March, according to the CME Group’s FedWatch Tool, penciling in a 39% chance on Tuesday compared to 73% a month ago.
Despite the chance of macroeconomic headwinds in the first quarter of this year, Farrell sees Bitcoin eclipsing $125,000 by the end of this year, buoyed by eventual rate cuts and Bitcoin halving slated for April.
