According to a recent analysis, the course of Bitcoin price may change depending on the decisions of the US Federal Reserve (FED). After enthusiasm for Bitcoin exchange-traded funds (ETFs) faded, the Fed's interest rate policy has become a key factor in the cryptocurrency market.
Europe-based digital asset manager CoinShares stated in a new report that Bitcoin price movements are affected by developments regarding interest rates. “A closer examination of the last 40 trading days shows an increasing correlation with interest rate expectations for June,” said James Butterfill, Director of Research at CoinShares. He pointed out that a similar trend is observed in 2023.
According to CME Fedwatch, the market expects the Fed to keep interest rates steady in June and is only considering the possibility of a decline in the fourth quarter of this year. Core Personal Consumption Expenditures (PCE) inflation, the FED's preferred inflation measure, was higher than expected at 2.8% in March.
Meanwhile, GDP growth figures remained below expectations and were recorded at 1.6% in the first quarter of 2024. These data showed that the manufacturing and service sectors were slowing down and raised stagflation concerns. Expectations that the Fed will keep interest rates high for an extended period of time have driven the Bitcoin price below $57,000 heading into the Fed's May 1 meeting.
However, while the FED kept the policy rate constant above 5.25%, it also announced plans to reduce quantitative tightening (QT). By reducing its balance sheet by $25 billion per month instead of the previous $60 billion, it slowed the rate at which it was shrinking the money supply in the economy. This was seen as a positive signal for Bitcoin and other risky assets that have previously thrived in easy-money macroeconomic environments, with Bitcoin's price surging above $60,000 after the Fed's announcement.
“Keeping front-end interest rates high while tightening the QT can be likened to braking and accelerating a car at the same time,” Butterfill said. He stated that the US Treasury may reach its short-term debt payment limit and that the FED is likely to make changes to its QT strategy.
Butterfill predicts the Fed will cut interest rates later this year in response to weakening economic data, and that the cut will likely be "later but larger than expected." The analyst says that thanks to Bitcoin's fixed supply and high immutability, the FED's interest rate cut could support Bitcoin prices.
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