A Deliberate Rate Cut Surprise
It has been said by Jerome Powell, Chairman of the Federal Reserve (Fed), that "the time has come" to take action on interest rates. Last week’s FOMC meeting confirmed this sentiment, with a 50 bps rate cut to 5.00% p.a., exceeding market expectations. This surprise move is likely just the beginning, as markets anticipate three additional cuts by year-end and five more next year.
The Fed Behind the Curve
Despite this significant rate reduction, it’s plausible that the Fed remains behind the curve. A standard Taylor rule analysis suggests a fed funds target rate of approximately 3.6% p.a. is warranted based on current economic conditions and inflationary momentum. Furthermore, a recent survey by Bank of America indicates that monetary policy was still too restrictive in September 2024, the most restrictive since October 2008.
A Recession Risk Lingers
Several indicators, including the Sahm rule, remain triggered, increasing the risk of recession. However, our quantitative analyses suggest global growth is becoming less relevant for bitcoin’s performance, while monetary policy and US dollar fluctuations have become more influential. A US recession may not be as detrimental to bitcoin as anticipated, potentially leading to increased Fed rate cut expectations and a weaker US dollar.
Global Liquidity Tide Turns
The recent moves by the Fed and other major central banks indicate a significant shift in global liquidity. Global money supply has reached new all-time highs and is accelerating. Expansionary money growth periods are often associated with bitcoin bull runs, while the re-steepening of the US yield curve signals increasing liquidity and potential bullishness for scarce assets like bitcoin.
A Perfect Confluence
The increase in global liquidity coincides with the supply scarcity of bitcoin, which has intensified since the April 2024 halving. Our analyses show that there tends to be a significant lag between the halving event and the moment the supply shock becomes significant. This perfect confluence between increasing demand via global money supply and reduced availability due to the halving could create an ideal environment for a bitcoin breakout.
Breaking Out of Consolidation
The market has been trapped in a "chopsolidation" phase, characterized by a choppy consolidating range-bound market since the latest all-time high in March 2024. Factors such as government sales, Mt. Gox trustee’s distribution, and macro capitulation contributed to this stagnation. Historically, the summer months have been among the worst for bitcoin performance, with September being the worst month of the year.
Q4 Breakout Potential
However, Q4 tends to be the best performing quarter for bitcoin seasonally, and we expect a breakout from consolidation in this period. The Fed’s pivot may have delivered the perfect catalyst for this anticipated move.
Conclusion
The recent Fed rate cut surprise has created an exciting environment for bitcoin investors. Despite ongoing recession risks, our analysis suggests that global growth is becoming less relevant for bitcoin, while monetary policy and US dollar fluctuations are gaining importance. The increasing supply scarcity of bitcoin, coupled with the growing demand via expanding global liquidity, may create a perfect storm for a breakout in Q4.
