Why Bitcoin Isn’t Growing Despite Anticipation of a Fed Rate Cut
The Federal Reserve’s key interest rate is currently at a 23-year high of 5.5%. This increase has dampened economic activity and driven excess liquidity into Treasury bonds. For instance, the yield on one-year Treasuries has surged from 0.1% in mid-2020 to the current 4.4%.
Investors are eagerly awaiting a loosening of monetary policy, which could reinvigorate capital inflows. On 23 August, Jerome Powell hinted at a potential rate cut in September. However, Bitcoin has since dropped 6.9%, down to $56,700. So why hasn’t this led to growth?
One-Year Treasury Rate
1. The Reverse Repurchase Programme (RRP)
The first reason is the lack of significant capital inflows into the markets, largely due to the Fed’s RRP programme, which currently offers a return of 5.3% per annum. Following Powell’s speech, inflows into repurchase agreements totalled $120 billion, drawing capital away from riskier assets like Bitcoin.
2. Bank of Japan’s Policy
On 3 September, the Governor of the Bank of Japan reaffirmed the possibility of raising the key rate if current economic trends persist. The rate has been near zero since 1995, creating favourable conditions for the carry trade — borrowing cheap yen to invest in a wide array of US securities.
An increase in Japan’s central bank rate would make these loans more expensive and strengthen the yen. This scenario often leads to a sell-off in a broad range of financial assets, including crypto stocks and Bitcoin.
3. US Recession Concerns
The Fed’s readiness to adjust monetary policy is closely linked to the broader economic environment, which has recently shown signs of weakening. The US Bureau of Labour Statistics revised down the number of new jobs over the past year by a record 818,000, the largest adjustment since 2009. Additionally, the PMI index for the manufacturing sector points to looming stagflation.
Fears of a recession are dampening investor sentiment, further discouraging liquidity from flowing into the markets.
Conclusion
While the Fed’s interest rate decisions have a significant impact on financial markets, they cannot be considered in isolation. A rate cut could eventually support growth, but this will take time — especially if additional negative scenarios unfold.
Cryptocurrencies involve complexity and carry a high risk of rapid monetary loss due to volatility and changing regulatory landscape. It’s crucial to ensure you understand how cryptocurrencies operate and can withstand the potential high-risk scenario of losing your assets.
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