The Federal Open Market Committee’s interest rate decision in September was fully expected, as the FOMC left interest rates at current levels of 5.25% to 5.5%. As also expected, the committee hinted that there may be another rate hike this year, with Fed Chairman Jerome Powell – as usual – insisting in his September 20 press conference that the task is to control inflation to bring it back to the Fed’s 2% target. No way done.”
What was more of a surprise, however, is the fact that the Fed raised its long-term forecast for the federal funds rate, which it expects will now be 5.1% by the end of 2024 – up from the June forecast of 4.6 % – before falling to 3.9% at the end of 2025 and 2.9% at the end of 2026. These numbers are well above previous forecasts and point to a “longer-term higher” scenario for US interest rates that not too many market participants had expected.
As a result, we saw a slight decline in the markets: the S&P 500 was down 0.80% shortly after the announcement, followed by the Nasdaq, which fell 1.28% – a big drop for these leading indices. Cryptocurrency markets also reacted negatively: Shortly after Powell ended his press conference, Bitcoin (BTC) fell below $27,000 and Ether (ETH) fell almost 2% to just over $1,600.
Related: How Bitcoin miners can survive a hostile market – and the 2024 halving
Ultimately, the data shows that the U.S. economy is returning to a state not seen since the 2008-2009 financial crisis, where economic growth and inflation remain relatively constant. A U.S. interest rate averaging about 4% over three years would be no surprise in this old world, nor would annual inflation of more than 2%.
The problem is that investors have become addicted to central banks pumping money quickly and freely into our economies to combat concurrent crises. As investors, we are now in a mentality where strong economic growth and stable inflation are interpreted as bad news – and the crypto markets seem to have the same opinion. This is particularly interesting considering that Bitcoin was founded during the financial crisis in direct criticism of the loose monetary policy decisions of the Federal Reserve, the Bank of England, and others.
The Federal Funds Rate from January 2000 to August 2023. Source: Board of Governors of the Federal Reserve System
It now seems clear that we cannot rely on central banks to issue our investment mandates. Rather, we need to focus more on the actual health of companies and the benefits, products and services they provide to their customers. In the crypto world, we need to carefully focus on the viability of the crypto ecosystem and what it can offer its users as an alternative or complementary financial marketplace.
Of course, in the short to medium term, that means we’ll all be waiting for the US Securities and Exchange Commission to make its decision on the shaky pile of spot Bitcoin ETF applications sitting on its desk, submitted by the world’s largest asset managers.
Related: What will Bitcoin do if the Justice Department targets Binance?
Franklin Templeton – one of the oldest asset managers in the US – has joined BlackRock, Fidelity, Invesco and others in the race to launch a mass-market fund for the world’s largest cryptocurrency. Should even one be approved, it will effectively mean that Bitcoin will join the global asset hall of fame, and we can expect cryptocurrencies to be added to portfolios around the world as an alternative investment in the coming bull market. However, if the SEC chooses one industry giant over another, we can expect a lot of unpleasant dinner parties on the Upper East Side.
If the SEC sticks to its guns and does not approve any of these applications, Bitcoin and other cryptocurrencies will continue to remain marginal assets. But that doesn’t mean they won’t find new price drivers and return to previous all-time highs. But we certainly won’t see much movement in the crypto markets until this issue is resolved in one way or another.
Likewise, the FOMC decision and Powell’s comments suggest that we won’t see much excitement on the macroeconomic side in the foreseeable future either. But if the US and global economies actually return to something like the old normal – uncharted territory for any investor under 40 – it could well be exactly what the world and even cryptocurrency markets need.
Lucas Kiely is the Chief Investment Officer of Yield App, where he oversees investment portfolio allocation and leads the expansion of a diversified investment product range. Previously, he was Chief Investment Officer at Diginex Asset Management and Senior Trader and Managing Director at Credit Suisse in Hong Kong, where he led QIS and structured derivatives trading. He was also head of exotic derivatives at UBS in Australia.
This article is for general information purposes and is not intended as, and should not be construed as, legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
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