In a recent statement, the International Monetary Fund (IMF) has recommended that the US Federal Reserve continue raising interest rates for an extended period to effectively address the issue of inflation. Additionally, the IMF has urged the Biden Administration to adopt stricter fiscal policies in order to reduce the federal debt burden. IMF Managing Director Kristalina Georgieva emphasized the need for the US Congress to establish an alternative approach to regulating debt, thereby eliminating the risk of debt ceiling brinkmanship, by incorporating it into the annual appropriations process.
US Fed Remains Committed to Rate Hikes, Targeting Over 6% Rate; Market Anticipates June Increase
US Federal Reserve officials have expressed their intention to maintain a steady course of rate hikes, dismissing the possibility of a pause or shift in policy. Their focus lies on raising the federal funds rate beyond its current range of 5% to 5.25%, with a target exceeding 6%. The rationale behind this stance is bolstered by recent economic indicators, including the annual PCE core inflation, the Fed's preferred measure, which surpassed expectations at 4.7% in April. Additionally, the tight job market further supports the case for continued rate increases.
Market sentiment aligns with expectations of a 25 bps rate hike in June, as indicated by the CME FedWatch Tool. The probability of such a rate hike has surged to 64%, up from 17% just a week ago.
On the fiscal front, a bipartisan agreement between President Biden and Representative McCarthy has been reached to raise the debt ceiling for a two-year period. The final details are being fine-tuned before the debt default deadline. As a result, the US Treasury Department's cash balance has declined significantly from $316 billion earlier in May to $38.84 billion.
Correction Expected in Stock and Crypto Markets as US Treasury Issues Treasury Bills, Bitcoin Vulnerable to US Dollar Liquidity Crunch
In the upcoming weeks, the stock and crypto markets are anticipated to enter a correction phase following the US Treasury Department's plans to issue $600-$700 billion in Treasury bills. This shift in focus towards Treasury bills is likely to divert attention away from equities and cryptocurrencies. As a result, Bitcoin may experience a temporary decline before rebounding after a few weeks, primarily due to a US dollar liquidity crunch.
The US dollar index (DXY) witnessed a surge above 104.25 on Friday following the release of the PCE inflation data. Investors are advised to closely monitor the US dollar and treasury yields, as Bitcoin tends to move inversely to these factors.
