Bitcoin Won't Move Up Until Fed Rate Cuts

Higher the interest rates, the more time it will take for Bitcoin to go up.

In recent months, Bitcoin’s price has been relatively stable, trading within a narrow range compared to its past volatility. While many factors influence Bitcoin's price, one key reason for its current stagnation is the Federal Reserve’s monetary policy, particularly regarding interest rates.

The Fed's decisions on whether to maintain, increase, or decrease rates play a significant role in shaping the broader financial landscape, and by extension, the demand for risk assets like Bitcoin. Until the Federal Reserve signals significant changes, such as cutting interest rates, Bitcoin's price is unlikely to move drastically. Here's why:

The Impact of Interest Rates on Bitcoin

Bitcoin, like other alternative assets, tends to attract investors in an environment where traditional assets such as bonds or savings accounts offer lower returns. When interest rates are high, as they have been since 2022, these traditional assets become more attractive. Investors seek the safety and relatively reliable returns that come from assets tied to interest rates, especially when inflation and market instability are present.

Currently, the Federal Reserve has maintained its interest rate at 5.3%, the highest level in over two decades. This high-rate environment strengthens the U.S. dollar and reduces liquidity in financial markets, making it less appealing to invest in speculative assets like Bitcoin. High borrowing costs and reduced availability of cheap credit lead to a preference for safer investments, steering attention away from riskier, volatile assets like cryptocurrencies.

Fed's Focus on Inflation and Employment

The Federal Reserve, under the leadership of Jerome Powell, has been laser-focused on managing inflation, which surged to multi-decade highs in 2022. The strategy to combat inflation has been to keep rates elevated, cooling demand in the economy and gradually bringing price increases under control. As Powell mentioned in his August 2024 speech at the Jackson Hole Economic Symposium, while inflationary risks have lessened, the employment market now faces more significant risks, signaling a potential change in monetary policy.

Powell’s remarks suggest that the Fed might be ready to turn the corner in its inflation fight, and that interest rate cuts could be on the horizon. If the Fed cuts rates, it would indicate a softening of its tight monetary policy. This could increase liquidity in the markets, lower borrowing costs, and make riskier investments like Bitcoin more attractive.

Bitcoin’s Sensitivity to Macro Conditions

Bitcoin is highly sensitive to macroeconomic conditions. Throughout its existence, the cryptocurrency has thrived during periods of economic uncertainty and when traditional financial systems appeared weak or underperforming. For example, during the COVID-19 pandemic in 2020, when central banks around the world slashed interest rates to near zero and injected liquidity into markets through quantitative easing, Bitcoin’s price skyrocketed as investors sought alternatives to fiat currencies and low-yielding traditional investments.

However, the opposite is true when central banks tighten monetary policy. The current period of high interest rates, which began in 2022, has led to a strong U.S. dollar, higher bond yields, and a challenging environment for Bitcoin and other risk assets. As the Fed's policies continue to signal caution with gradual adjustments based on inflation and employment data, Bitcoin’s price has remained subdued.

Will the Fed Cut Rates Soon?

In his Jackson Hole speech, Powell indicated that the Federal Reserve is poised to adjust its policy by cutting rates, with September 2024 likely to be the starting point. However, the exact timing and magnitude of these cuts will depend on forthcoming economic data, particularly job market reports and inflation readings. Powell underscored that the Fed remains cautious and focused on striking the right balance between supporting employment and ensuring price stability.

A rate cut would signal that the Fed believes inflation is sufficiently under control and that the economy is softening enough to warrant a more accommodating monetary policy. This move would likely encourage investors to return to riskier assets, including Bitcoin, as the returns from traditional assets like bonds and savings accounts diminish with lower interest rates. Consequently, a rate cut could lead to increased demand for Bitcoin, pushing its price higher.

Bitcoin’s Price Outlook

Until the Federal Reserve begins cutting rates, Bitcoin’s price is expected to remain relatively stagnant. Investors are waiting for clear signals that the tightening cycle is over and that the cost of capital will decrease. While some crypto investors may continue to accumulate Bitcoin during this period, larger price movements are unlikely without a major macroeconomic shift, such as a Fed rate cut.

If the Fed does cut rates in September or later in 2024, we could see renewed interest in Bitcoin as liquidity improves and traditional asset yields decline. However, the exact trajectory of Bitcoin's price will depend on how aggressively the Fed moves and how financial markets respond to these changes. A cautious or gradual rate-cutting approach could lead to a slow upward movement in Bitcoin’s price, while a more aggressive cut could trigger a more rapid price increase.