Potential Fed pivot has crypto and macro analysts extremely bullish on Bitcoin price outlook
Fidelity’s head of macro says the end of the Federal Reserve’s quantitative tightening program could be bullish for Bitcoin and gold.
The U.S. Federal Reserve began its most aggressive quantitative tightening measures in March 2022, raising its benchmark interest rate from near zero to between 4.75% and 5% per year that year. While the central bank has been somewhat successful in reducing inflation, rising interest rates are beginning to cause cracks in the global banking industry.
Markets expect the Fed to end quantitative tightening and provide favorable liquidity conditions to avoid a global financial crisis when banks start to fail. A shift in Fed policy should have a significant impact on financial assets.
Fidelity Global Macro Head Jurrien Timmer discusses the possible impact of the Fed’s dovish turn on stocks, gold, and Bitcoin.
Markets expect the Fed to end rate hikes
The Fed is widely expected to either keep interest rates at current levels or start cutting them. The market is currently pricing in a 50% chance that the March 25 basis point hike will be the last for some time, according to the CME’s FedWatch tool.
If the Fed stops raising rates, risk assets like stocks could see a positive rebound based on historical data. The average one-year return for the S&P 500 after the last rate hike since 1984 was 18.9%.
Timmer also recently noted in a tweet that “the last rate hike is usually (but not always) followed by a rate cut very soon after.”
Lower interest rates will make credit cheaper for companies and individuals, improving liquidity in the market. Low interest rate regimes are often associated with bull markets in risky assets such as stocks and cryptocurrencies.
However, Timmer mentioned that this is a “bullish development for stocks (lower cost of capital). But historically, eventual tightening by the Fed has not led to clear direction for stocks.” In some cases, stocks have remained bearish for several years before the trend reversed.
Bitcoin and gold move in lockstep
However, the implications for gold and, by extension, Bitcoin, are largely bullish. If the Fed plans to start lowering interest rates while inflation remains high, it will result in negative real interest rates for investors. The income rate is lower than the inflation rate, so it is repressive. Financial repression is more effective than raising taxes or cutting spending, but it will result in losses for bondholders.
Technically, gold has formed a bullish breakout near the previous high of $1,950 in 2023. This level has also served as a long-term resistance for the gold price, indicating active buyer interest.
Timmer added, “When you get all three of those conditions (negative real rates and positive price and monetary inflation), it’s a triple positive for gold.”
The latest Bitcoin rally has seen an increase in correlation with gold and a decrease in correlation with the S&P 500. The correlation coefficient between Bitcoin and gold is 1, compared to the S&P 500’s low relationship of 0.13.
Bitcoin is benefiting from the narrative surrounding a potential global banking crisis, solidifying its position as a non-correlated asset like gold. BTC/USD’s move above $28,000 alongside gold further suggests buying activity is increasing.
Therefore, if the Fed shifts from a hawkish rate hike policy to a dovish stance, it could create bullish conditions for the market.
While the outcome for the stock market hangs in the balance due to inflation risks, gold is expected to shine in the medium term. Bitcoin is also likely to benefit from the macroeconomic environment given its positive correlation with gold.
