Yesterday, the Fed announced that it had cut interest rates by 25 basis points. Despite the markets widely expecting this cut, the price of Bitcoin reacted negatively.
The reason for this decline is actually not at all related to the cut itself, but to more complex considerations that particularly concern what the Fed Chairman, Jerome Powell, said during the subsequent press conference.
The decline of Bitcoin due to the Fed’s announcement
When the Fed announced the rate cut of 25 basis points, the price of Bitcoin was limited to moving from about $104,000 to about $103,000.
On the other hand, it was exactly what the markets were expecting, and what they had already widely priced in.
However, in that decline there was already something that suggested that the situation was less rosy than imagined.
In fact, half an hour later, with the start of Powell’s press conference, the decline accelerated.
During the press conference, which lasted less than an hour, the price of BTC had already fallen below $101,000, and after the opening of the Chinese markets, it also fell below $100,000.
After briefly touching $98,800, it then bounced back, also because the Chinese stock markets, after opening with a sharp decline, recorded a small rebound.
Now Bitcoin is back to about $101,000, and with the reopening of the American stock exchanges in the afternoon, it could theoretically recover a bit more of the ground lost yesterday.
The error of the Fed that caused the price of Bitcoin to crash
The words of Powell that triggered the decline are those that the Fed Chairman spoke regarding not the current situation, but the future one.
In particular, he admitted between the lines that the Fed was wrong in estimating the decline in inflation expected for 2025, and that they have now had to correct these estimates in a less optimistic way.
This reasoning, however, might also have created a misunderstanding.
In fact, the reason why the estimates on inflation for 2025 have proven to be excessively optimistic is that the USA economy is doing better than expected.
When an economy is doing well, consumption often increases, or at least remains high, driven by strong demand. At this moment, inflation in the USA is not generated by expansive monetary policies (since they are actually restrictive), nor by a shortage of supply.
In other words, the economic picture outlined yesterday by Powell turned out to be better than expected, and this is expected to generate greater demand for consumer goods than forecasted, and therefore greater inflation.
The repositioning of the market
What pushed the financial markets down was the slight change of course that the Fed had to admit yesterday due to the recalculation of inflation estimates.
It should be noted that the Nasdaq-100 index yesterday lost 3.6% in a single day, a figure that is rarely seen on the Nasdaq. S&P500 lost 2.9% and even the Dow Jones lost more than 2.5%.
This is probably the result of a true repositioning by many investors in light of the new forecasts, perhaps combined with the sudden dissolution of a small excess of enthusiasm that had recently developed, particularly after Donald Trump’s electoral victory.
The key point is that a slightly less prosperous economic situation was estimated for 2025, if not even negative, whereas according to Powell’s words, the economic situation in the USA in 2025 should be decidedly prosperous.
Therefore, it was also estimated that there would not be such a strong demand for consumer goods in 2025 to sustain inflation.
A “natural” decrease in inflation was therefore expected for 2025, which would have allowed the Fed to cut rates further several times.
However, now the Fed estimates that inflation in 2025 might decrease very little, so much so that it plans to make only two cuts of 25 basis points each next year.
It was precisely this change in perspective, from 4 to 2 cuts during 2025, that forced the markets to reposition themselves.
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Today, however, with a cool head and after repositioning, things could change.
The fact is that the economic outlook described yesterday by Powell is decidedly positive, and once the repositioning is completed, the markets could begin to price in a better-than-expected economic situation for next year.
Of course, in 2025 some of the expected cuts to interest rates will be missing, but on the other hand, the risks associated with a possible recession, now considered unlikely, are also greatly reduced.
This on one hand means that interest rates will remain relatively high, thus putting a brake on liquidity, but on the other hand it also means that the economic performances of American companies could be better than expected next year. This is why, at least in theory, today the American markets could react well to the new scenario, after yesterday’s necessary repositioning.
The Fed and Bitcoin
Yesterday, Powell in the press conference also responded to a specific question about Bitcoin.
However, he limited himself to saying that the Fed, in the current state, cannot purchase Bitcoin, not even if the USA were to opt for a strategic reserve in BTC, also implying that they would not be inclined to do so.
He also clarified that the issue of the strategic reserve in Bitcoin is a matter for Congress, making it clear that the Fed has nothing to do with this matter, which will have to be entirely managed by the government and Congress.
So for now there will be no type of connection between the Fed and Bitcoin.
