The US Federal Reserve is expected to maintain its hawkish stance on the benchmark lending rate until the end of this year, that is, to pursue a tough policy on markets. According to users of the decentralized betting platform Polymarket, the probability of such a development is estimated at 32 percent. Moreover, just a month ago this category accounted for only 7 percent of the votes. Let's talk about what's happening in more detail.
The US Federal Reserve's policy boils down to actions regarding the base interest rate, which determines the cost and availability of financial loans. Now the rate is at a high level, which is a consequence of the massive printing of money amid the coronavirus pandemic in 2020. In this way, the authorities are trying to combat the increased supply of funds in circulation and reduce it, while simultaneously reducing inflation.
The main problem with the Fed's hawkish stance is the lack of motivation for most investors to invest in cryptocurrencies, technology stocks and other high-risk assets.. Still, a high lending rate makes borrowing new capital less profitable, which negatively affects both companies and investors’ risk appetite. At the same time, capital owners in such conditions prefer to contact US Treasury securities, which are low-risk and can now bring more than 5 percent annual returns.
US Federal Reserve Chairman Jerome Powell
What will happen to the cryptocurrency market in the future?
Of all the available options regarding the forecast for the situation with the base interest rate, three options received the most rates – 0, 1 or 2 rounds of rate cuts by the US Federal Reserve until the end of 2024. The remaining options for 3, 4, 5, 6 or more rounds are significantly behind in terms of odds, which means market participants consider them unlikely.
Let us recall that in early February, US Federal Reserve Chairman Jerome Powell said that his colleagues plan to cut the base interest rate three times in 2024.. However, it has since become clear that bankers were unable to combat inflation to predetermined levels, and therefore the prospect of a rate cut may be postponed.
Nevertheless, a decrease in the base interest rate traditionally leads to increased activity among investors. Well, inflation in such conditions most likely will not decrease.
Probability of next rounds of rate cuts in accordance with rates on the Polymarket platform
The most popular option, that is, without reducing the bet by the end of the year, can bring the player 876 percent of the profit on his bet. In particular, a $10 bet would bring in almost $100 in total.
It is important to note that users of this platform do not know the future, so their expectations may easily not be met. Be that as it may, the corresponding rates reflect the mood of the crowd regarding possible actions of the US Federal Reserve representatives. Therefore, it is definitely worth listening to them.
Polymarket bet on future US Federal Reserve actions
The highest odds mean that the majority of users bet on this particular outcome of events. In other words, market players’ expectations for the prospects of digital assets are now far from the best.
According to CoinDesk sources, the rapid rise in Bitcoin price to a historical high of $73,777 on March 14 was also due to expectations of a reduction in the base lending rate in 2024.
Changes in the US benchmark interest rate over three years
Player sentiment on Polymarket matches the narratives that dominate investors in traditional markets. Today, most financial industry participants expect only two rate cuts of 25 basis points this year.
At the same time, at the beginning of January 2024, expectations were much more optimistic and reached six rounds of rate cuts.. However, Bank of America analysts recently postponed the date of the first rate cut from June to December, while Societe Generale advised not to wait for a change in Fed policy until 2025.
Just a few weeks ago, there was a consensus among experts that inflation in the American economy would continue to decline.. This would give the Fed additional incentive to lower its benchmark lending rate.
However, fresh earnings releases – especially the March jobs report and higher inflation amid expectations – have weakened the case for an immediate rate cut.. This was stated by the author of the newsletter called “Crypto Is Macro Now” Noel Acheson. Here is her response.
We know that there are no traditional reasons for a rate cut in the US in the short term. Employment is strong, retail sales are ahead of expectations, first-quarter GDP is not expected to be much lower than fourth-quarter, and inflation is stagnant. Even Fed Chairman Powell – yes, the same one who told us less than four months ago that a rate cut was imminent – is now saying that they can keep rates high longer than previously thought.
US Federal Reserve Chairman Jerome Powell
In this cycle, Bitcoin was able to reach a new all-time high even before the halving, which occurred tonight.. It looks like this is not the only unprecedented event. However, if the Fed does not reduce rates for a long time, market consolidation after the halving will drag on for a longer period.
Accordingly, the interest of the broad masses of investors in what is happening in crypto may become more active later.
Typically, high interest rates lead to low activity among capital holders, who have less reason to take risks. Accordingly, in theory, such conditions in the economy will restrain the growth of the cryptocurrency market and investor interest in it.
However, it is important to note here that the base interest rate has been at a high level for more than a year. And just during this period, Bitcoin was able to quite easily update its historical maximum, while new ETFs based on the first cryptocurrency attracted huge capital from investors. This means that we can assume that the unwillingness of representatives of the US Federal Reserve to reduce the rate may not prevent the current bull run.