Cryptocurrencies Bitcoin, XRP, Shiba Inu Rebound After Fed’s Dovish Shift
By Bram Berkowitz - December 20, 2024 at 12:43 PM
Key points
Comments from the US Federal Reserve Chairman on Wednesday sent the market into a tailspin as investors fretted over lower interest rates next year.
Inflation has fallen this year but remains above the Federal Reserve's preferred 2% target.
The market got some relief this morning with more positive inflation data.
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Cryptocurrency prices are up this morning after suffering heavy losses this week following the Federal Reserve’s final meeting of the year on Wednesday. The meeting included a 25 basis point interest rate cut and a more hawkish speech from Fed Chairman Jerome Powell that appeared to catch investors off guard.
Bitcoin ( BTC -1.82%) , a bellwether for the sector, fell as much as 10% yesterday but was down just under 1% since late afternoon. It was trading around $97,300 as of 11:33 a.m. ET on Friday. XRP ( XRP -1.35%) also recovered most of its losses from Thursday after falling as much as 9%. Shiba Inu ( SHIB -0.45%) fell as much as 16% yesterday but was down just about 4% recently.
Fed Coal or Satisfied Market?
On Wednesday, the Federal Reserve wrapped up its final meeting of the year and cut interest rates by 25 basis points, as nearly all traders had expected. “We will be cautious about further cuts,” Powell said during his press conference. Fed officials now expect only two rate cuts in 2025, down from four cuts in September.
Some may have interpreted this as a Christmas treat from Powell and the Fed to the market, but I was surprised to see the market selling so strongly. The market certainly looks overvalued. However, Powell’s comments and the Fed’s new forecasts shouldn’t come as a surprise to those paying attention.
Inflation remains above the Fed’s preferred 2% target, and the labor market remains strong. Fed officials appear to be taking a wait-and-see approach to President-elect Donald Trump’s policies. Some fear that Trump’s proposed tax cuts and tariffs could reignite inflation.
Even more bizarre is that just a week ago, CME Group’s FedWatch tool showed that about 33% of traders were betting on a cut to the federal funds rate to a range of 3.75% to 4%, while 27% of traders expected the rate to end up in 2025 at a range of 4% to 4.25%.
Now, about 34.5% of traders expect 2025 to end in a range of 4% to 4.25%. The odds have changed, but not by much.
The market has become frothy, so I imagine investors didn’t need much of a reason to sell after two years of impressive returns. The trajectory of interest rates has had a major impact on cryptocurrencies – the sector seems to be benefiting from further rate cuts expected.
Fortunately, the market got some respite this morning after the Fed’s preferred inflation gauge, personal consumption expenditures, rose 0.3% in November, slightly below expectations. The PCE index, which strips out more volatile food and energy prices, rose 2.4% on a year-over-year basis, also slightly below expectations.
I haven't seen much news regarding tokens, although the SEC recently approved a proposal from crypto asset manager Hashdex and Franklin Templeton to form a spot cryptocurrency index exchange-traded fund that combines Bitcoin and Ethereum.
Expect some volatility.
Macroeconomic news seems to be driving the market this week as investors try to figure out where interest rates and inflation will go in 2025. I think the market will see some volatility as arguments swirl and new data emerges. A clear picture is yet to emerge.
Bitcoin, XRP, and Shiba Inu are all expected to benefit if interest rates fall or if the market begins to believe that prices will fall more than expected (unless there is a recession). Shiba Inu and XRP will be more volatile than Bitcoin, which is the more stable play because many view the token as a hedge against inflation.
