The US Federal Reserve began its most aggressive quantitative easing efforts in March 2022, raising benchmark interest rates for the year from near zero to 4.75% to 5% per year. While the central bank has managed to reduce inflation to some extent, rising interest rates are starting to ease. cause cracks in the global banking industry.
The market expects the Fed to end quantitative tightening and provide favorable liquidity conditions to avoid a global financial crisis when banks start to fail. The change in Fed policy should have significant implications for financial assets.
Jurrien Timmer, Fidelity’s director of global macro, discussed the likely impact of the Fed’s dovish turn on stocks, gold and Bitcoin.
The market expects the Fed to end interest rate hikes
The Fed is largely expected to hold interest rates at current levels or start cutting them. CME’s FedWatch tool shows that the market currently has a 50/50 chance that the March 25 basis point hike will be the last for a while.
If the Fed stops its rate hikes, risky assets like stocks may see a positive rally based on historical data. The average one-year return for the S&P 500 index after the last rate hike since 1984 was 18.9%.
Timmer also recently noted in a tweet that “the last rise is often (but not always) quickly followed by a cut.”
A rate cut would make credit between companies and individuals cheaper, improving market liquidity. Low interest regimes are often associated with bull runs in risky assets like stocks and cryptocurrencies.
The last walk is often (but not always) quickly followed by a cut. pic.twitter.com/08czI2C6lq
— Jurrien Timmer (@TimmerFidelity) March 27, 2023
However, Timmer mentioned that it is a “bullish development for stocks (lower cost of capital). But historically, the final tightening of the Fed produces anything but a clear direction for stocks. There have been cases where stocks have held downtrends for a couple of years before reversing the trend.
If the Fed finishes raising rates and takes a dovish turn soon, as many expect, it could be a bullish development for equities (lower cost of capital). But historically, the final tightening by the Fed produces anything but a clear direction for stocks. Be careful what you wish for. pic.twitter.com/xQw6WfcTjR
— Jurrien Timmer (@TimmerFidelity) March 30, 2023
Bitcoin and gold move in unison
However, the implications for gold and by extension Bitcoin are largely bullish. If the Federal Reserve plans to start cutting interest rates and inflation levels stay high, it creates negative real interest for investors. The income rate is less than the inflation rate and is therefore repressive. Financial repression works better than raising taxes or cutting spending, but it creates losses for bondholders.
Technically, gold staged a bullish break above the previous peak in 2023, around $1,950. This level also formed long-term resistance to gold prices, indicating active interest from buyers.
Timmer added: “When you get all three (negative real rates and positive price and money inflation), it’s a bullish trifecta for gold.”
Related: Is a Housing Crisis Looming? Why crypto investors should care
Bitcoin’s latest rally has seen an increasing correlation with gold and a drop in its correlation with the S&P 500 index. Bitcoin and gold move in unison with a correlation coefficient value of one compared to a low proportional relationship of 0.13 with the S&P 500 index.
Bitcoin is benefiting from the narrative surrounding a potential global banking crisis, strengthening its position as an uncorrelated asset like gold. The positive breakout of the BTC/USD pair above $28,000 along with gold further shows that buying activity is picking up.
Therefore, if the US Fed moves from a hawkish rate hike regime to a dovish stance, it could create bullish conditions for the market.
While the outcome of the stock markets hangs in the balance due to inflation risks, gold is expected to shine in the medium term. Given the positive correlation with gold, Bitcoin can also benefit from the macroeconomic environment.
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