Bitcoin recorded gains on Monday, with the digital asset surpassing the $43,000 level. The move comes as markets expect the Federal Open Market Committee (FOMC) meeting in May to begin a cycle of U.S. central bank interest rate cuts.
The world's largest cryptocurrency by market capitalization rose more than 0.5% in the past 24 hours to $43,100 as of 7:30 a.m. ET, according to The Block's price page.
Andre Dragos, head of research at ETC Group, said market participants expect the Fed to begin a rate-cutting cycle in May based on the amount currently priced in federal funds futures.
Federal funds futures contracts essentially represent market expectations for future interest rates. Investors can use these futures contracts to express opinions on the direction of interest rates and manage interest rate risk in their portfolios.
In an interview with The Block, Dragosh added that the market is pricing in the possibility that the Fed will start cutting rates in March. This coincides with Federal Reserve Chairman Jerome Powell ruling out an early rate cut in 2024 in an interview on CBS' 60 Minutes on Sunday.
Chairman Powell said the March interest rate cut expected by Wall Street was “unlikely to materialize.” “We've said we want to have more confidence that inflation is coming down to 2%,” Powell said in an interview. “I think it's unlikely that this committee will reach that level of confidence before its March meeting in seven weeks.”
Stress at local banks could prompt interest rate cuts
But Dragosh said the prospect of higher long-term interest rates and the latest U.S. employment data could “counterintuitively increase the likelihood of an early rate cut.”
“I think a reversal in monetary policy could be caused both by an increase in systemic risk within the banking system and by a significant rise in unemployment,” Dragosh said.
“The longer the Fed keeps interest rates at current levels, the more likely there will be a type of 'accident' or credit event within the regional banking system, particularly among financial institutions with significant exposure to U.S. commercial real estate. I think that's due to the recent stress.''Bank stocks like New York Community Bank speak volumes on this point, he added.
Cryptocurrency market reaction to delayed interest rate cut
Dragosh expects that Bitcoin and other cryptocurrencies may initially see a decline as interest rates are likely to be delayed until May.
“This price movement could occur as global economic growth expectations decline on the back of a possible US recession,” he added.
But the analyst said May's potential monetary policy shift, particularly in combination with a weaker US dollar, “should provide a significant second-order tailwind.”
US employment statistics reveal mixed indicators
Friday's summary of the U.S. employment situation ostensibly revealed that the U.S. economy remains strong despite predictions that a recession is imminent. The better-than-expected jobs report showed the U.S. economy added 353,000 jobs, well above the consensus estimate of 185,000.
However, Dragosh noted that a closer look at Friday's major payroll numbers shows that certain indicators, such as average hours worked, continue to decline to levels typically associated with recessions. .
“Furthermore, high-frequency indicators such as Google search queries for 'unemployment claims' in the U.S. have trended parabolically, suggesting that weakness in the U.S. labor market is accelerating,” Dragosh said. added.
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