The Federal Reserve (Fed) began aggressive quantitative tightening in March 2022, raising its benchmark interest rate for the year from near zero to between 4.75% and 5% per annum. While central banks have been somewhat successful in reducing inflation, rising interest rates are starting to cause cracks in the global banking sector.
As a result, markets expect the Fed to end quantitative tightening and provide favorable liquidity conditions to avoid a global financial crisis when banks start to fail. A change in Fed policy would have an important impact on financial assets.
Jurrien Timmer, global director of macroeconomics at Fidelity, said: discuss On the possible impact of a dovish Fed policy on stocks, gold and Bitcoin.
Market expects Fed to stop raising interest rates
The Fed is widely expected to either keep interest rates at current levels or start cutting them. The market now sees a 50% chance that the March 25 basis point rally will be the last up for a while, according to the CME’s FedWatch tool.
CME FedWatch tool as of March 30 | Source: CME Group
If the Fed stops raising interest rates, based on historical data, risky assets such as stocks may see a positive rebound. Since the last rate hike since 1984, the average one-year return for the S&P 500 has been 18.9%.
S&P 500 has stopped raising interest rates since 1984 | Source: Crypto_HD
More recently, Timmer also pointed out tweet That:
“Usually (but not always) the last rally is followed by a decline.”
Source: Jurrien Timmer
A rate cut would make credit cheaper between companies and individuals, improving market liquidity. Low interest rate regimes are often associated with rallies in risky assets such as stocks and cryptocurrencies.
However, Timer mentioned This is “upside development of the stock (lower cost of capital)”. But historically, the last time the Fed tightened policy, it produced nothing but direction for the stock market. In some cases, stocks stayed in a downtrend for years before reversing.
Source: Jurrien Timmer
Bitcoin and Gold Move in Sync
However, the implications for gold and bitcoin are largely bullish. If the Fed plans to lower rates and inflation remains high, that would lead to negative real interest rates for investors. Profit growth rates are lower than inflation, so there is a suppression. Financial repression is smoother than tax hikes or spending cuts, but at the expense of bondholders.
Technically, gold has broken out of its previous high in 2023 around $1,950. That level also formed long-term resistance for gold prices, suggesting buoyant buyer interest.
Timer added:
“When you get all three (negative real rates and prices, positive monetary inflation) it’s a bullish trifecta for gold.”
Bitcoin’s recent bull run has seen an increase in correlation with gold and a decrease in correlation with the S&P 500. Bitcoin and gold move in tandem with a correlation coefficient value of 1 and a low ratio relationship with the S&P 500 of 0.13.
Bitcoin-Gold (top) and Bitcoin-S&P 500 (bottom) correlations | Source: TradingView
Bitcoin is benefiting from the backdrop of a potential global banking crisis, cementing its status as a non-correlated asset like gold. BTC’s move above $28,000 along with gold is a further sign that buying activity is picking up.
Therefore, if the Fed shifts from a hawkish rate hike mode to a dovish stance, it could create bullish conditions for the market.
While stock market performance has been weighed down by inflation risks, gold is poised to shine in the medium term. By being positively correlated, Bitcoin can also benefit from the macroeconomic backdrop.
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As reported by Cointelegraph
