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Author: Markus Thielen, Founder and CEO of 10xResearch
Markets are eagerly anticipating Fed Chair Powell’s speech on Friday, August 23, at Jackson Hole. He’s expected to signal that the Federal Reserve is prepared to cut interest rates at its upcoming September 18, 2024 meeting. This decision would follow one of the longest periods in recent history during which the Fed raised rates, paused for an extended duration and shifted to a more accommodative monetary policy.
Given Bitcoin's relatively short 15-year history, there are few historical parallels to draw from when comparing its performance during near-zero interest rates, such as those seen after the Global Financial Crisis of 2007-2008. However, the last time monetary policy followed a similar path with the Fed adopting a wait-and-see approach, Bitcoin experienced significant gains. This suggests that Bitcoin performs strongly when the Fed pauses its tightening cycle.
After consistently raising rates throughout 2018, the Fed’s decision to hold the federal funds rate steady at its Jan 30, 2019 meeting marked a pivotal shift in monetary policy. This pause reflected the Fed’s more cautious response to growing economic uncertainties and concerns over slowing global growth, signaling a move from aggressive tightening toward a more measured approach.
On Jul 31, 2019, the Fed lowered the federal funds rate, which fueled a 169% surge in Bitcoin prices from the Fed's pause in January 2019 to this first rate cut in July. Fed Chair Jerome Powell attributed the rate reduction to global economic uncertainties, muted inflation, a mid-cycle adjustment and the desire to support ongoing economic expansion.
Exhibit 1: Bitcoin in 2018–2020 (LHS) vs. U.S. Interest Rates (RHS)
Although Bitcoin initially jumped 20% following the Federal Reserve's rate cut, this rally was short-lived, as prices declined. Despite the Fed implementing two additional rate cuts later in the year, Bitcoin ended 2019 down 35% from its peak following the first rate cut.
Similarly, after the Fed's final rate hike in July 2023, Bitcoin was trading at around $29,300, and has since more than doubled in value. However, it's important to consider the less optimistic scenario when the Federal Reserve begins cutting interest rates. Traders need to understand the underlying reasons behind the rate cuts, as the context for such decisions can significantly influence market reactions.
This experience underscores the Fed's decision to cut interest rates in 2019, driven by low inflation, broader economic uncertainties and the need to support ongoing economic growth.
Unlike in 2019, Powell may now stress that, while inflation remains above the Fed's 2% target and monetary policy remains restrictive, a modest 25 basis point (bps) interest rate cut could still be considered. This stance, shy of a 50 bps cut, could raise concerns and send a negative signal to markets. Just as in 2019, Bitcoin could initially surge following a rate cut announcement, only to quickly lose those gains as economic uncertainties mount.
Investors should pay close attention to Powell's statements, and track economic data carefully. A data-dependent Fed will likely wait to see how incoming information influences interest rate decisions at upcoming meetings. Savvy investors can position themselves strategically ahead of these rate meetings, use their judgment to anticipate market trends and adjust their strategies accordingly.
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