As the US economy grapples with rising inflation expectations and reduced forecasts for Federal Reserve rate cuts, the bitcoin market remains buoyant, according to detailed analysis from Reflexivity Research. With US headline CPI inflation expected to accelerate to 4.8% by the November 2024 election, according to Bank of America, conditions appear unfavorable for an easing of monetary policy. Despite this, the cryptocurrency sector, particularly bitcoin, appears insular and optimistic.
bitcoin unfazed by rate cut delays?
The bond market now anticipates just three Federal Reserve rate cuts this year, a significant reduction from the previous forecast of six. The CME FedWatch tool indicates that most market participants do not expect a rate cut to occur before the FOMC meeting in mid-September. This adjustment reflects a recalibration of expectations about the Fed's ability to manage persistent inflationary pressures.
Amidst these macroeconomic changes, Ritik Goyal, in a guest speech twitter.com/reflexivityres/status/1780672578178224130″ target=”_blank” rel=”nofollow”>mail for Reflexivity Research, presents a compelling analysis in his report titled “The Federal Reserve Cannot Cause a Recession.” “Risk assets have not yet realized this.”
The report argues that, contrary to conventional wisdom, the Federal Reserve's rate increases have had unintended stimulative effects on the economy. Goyal elucidates three specific mechanisms through which this phenomenon operates:
1. Increase in government interest payments: “The rate hikes increased interest payments by the government to the private sector,” says Goyal. As the Federal Reserve raises rates, it increases the interest burden on the government, which has gone deep into debt during the post-COVID period. With a federal debt-to-GDP ratio above 120%, the doubled interest payments now effectively act as a stimulus, funneling approximately $1 trillion annually to the private sector.
2. Direct subsidy to the banking system: The Federal Reserve's policy adjustments have also led to a redistribution of wealth within the financial system. “The rate hikes increased the Fed's direct subsidy to the banking system,” says Goyal. This has occurred when the inversion of the yield curve resulted in the Federal Reserve incurring losses on its balance sheet, losses that directly benefit the banking sector and translate into an estimated annual subsidy of $150 billion.
3. Induced boom in housing construction: Paradoxically, rate increases have stimulated the real estate market. “The rate hikes caused a boom in housing construction,” according to Goyal. As higher rates discourage existing homeowners from selling, the only viable option to meet housing demand is new construction, a sector with one of the highest GDP multipliers.
Goyal's insights underscore a critical misalignment in the Federal Reserve's current approach in the context of major fiscal interventions since the pandemic. “The traditional monetary policy framework is collapsing under the weight of fiscal dominance,” Goyal concludes, suggesting an environment that could favor non-traditional assets like bitcoin.
Echoing Goyal's findings, cryptography expert Will Clemente twitter.com/WClementeIII/status/1780678578293690375″ target=”_blank” rel=”nofollow”>highlighted the broader implications for cryptocurrencies on who buy assets—~$1 trillion will be paid in 2024. The overall picture is very constructive for Internet currencies.”
At the time of publication, btc was trading at $61,173.
Featured image from Shutterstock, chart from TradingView.com
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