Potential Fed pivot has crypto and macro analysts ultrabullish on Bitcoin’s price outlook

by · April 3, 2023

The US Federal Reserve began its most aggressive quantitative easing in March 2022, raising benchmark interest rates in the year since from near zero to 4.75% to 5% annually. While the central bank has succeeded in bringing down inflation to some extent, rising interest rates are starting to do so causing cracks in the global banking industry.

The market expects the Fed to end quantitative easing and provide favorable liquidity conditions to avoid a global financial crisis when banks begin to fail. The change in Fed policy should have significant implications for financial assets.

Jurrien Timmer, director of global macro at Fidelity, discussed the likely impact of the Fed’s dove pivot on stocks, gold and Bitcoin.

The market expects the Fed to put an end to interest rate increases

The Fed is widely expected to either keep interest rates at current levels or start cutting interest rates. CME’s FedWatch tool shows that the market currently has a 50% chance that the March 25 hike was the last for a while.

CME FedWatch Tool as of March 30. Source: CME

If the Fed halts its interest rate hikes, risk assets such as stocks could experience a positive rebound based on historical data. The average one-year return in the S&P 500 index after the last interest rate increase since 1984 has been 18.9%.

Break-even gains by rates in the S&P 500 index since 1984.

Timmer also recently noted in a tweet that “The last hike is often (but not always) quickly followed by a cut.”

A cut in interest rates will make credit cheaper across companies and individuals, and improve market liquidity. Low interest rate regimes are often associated with bull runs in risky assets such as stocks and crypto.

However, Timmer mentioned that there is a “bullish development for stocks (lower cost of capital). But historically, the final Fed tightening provides anything but a clear direction for stocks.” There have been cases where stocks have maintained bearish trends for a couple of years before the trend reverses.

Bitcoin and gold move in lockstep

However, the implications for gold and, by extension, for Bitcoin are largely bullish. If the Fed plans to start cutting interest rates and inflation levels remain high, it leads to negative real interest for investors. The rate of earnings is less than the rate of inflation and is therefore oppressive. Financial repression works more smoothly than raising taxes or cutting spending, but it results in losses for bondholders.

Technically, gold had a bullish breakout above the previous peak in 2023, around $1,950. This level also formed long-term resistance for gold prices, signaling active buying interest.

Timmer added, “When you get all three (negative real interest rates and positive price and money inflation), it’s a bullish trifecta for gold.”

Related: Is a housing crisis brewing? Why Crypto Investors Should Care

The recent Bitcoin rally has seen a rising correlation with gold and a falling correlation with the S&P 500 index. Bitcoin and gold move in lockstep with a correlation coefficient value of one compared to a low proportional relationship of 0.13 with the S&P 500 index.

Correlation coefficient for Bitcoin Gold (top), and the Bitcoin-S&P 500 Index (bottom). Source: TradingView

Bitcoin benefits from the narrative surrounding a potential global banking crisis, strengthening its position as an uncorrelated asset like gold. The BTC/USD pair’s positive break above $28,000 along with gold further shows that buying activity is increasing.

So if the US central bank swings from the hawkish rate hike regime to a dovish stance, it could create positive conditions for the market.

While the outcome for equity 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 setting.