Key Takeaways:
The US Federal Reserve Open Market Committee (FOMC) interest rate decision on May 7 will be a defining moment for risk-on assets, including cryptocurrencies. While the consensus points to no change in interest rates, Bitcoin (BTC) and altcoins could see gains if the US Treasury is compelled to inject liquidity to stave off an economic recession.
A more accommodative monetary policy could stimulate activity, but the Federal Reserve (Fed) is also contending with a weakening US dollar. Some analysts argue that a US interest rate cut may fail to stimulate growth as recession risks persist, potentially creating an ideal environment for alternative hedge assets such as cryptocurrencies.
Source: Jim Paulsen
Economist and investor Jim Paulsen notes that when Fed funds trade above a “neutral” interest rate (Fed Funds minus the annual core Personal Consumption Expenditures Index), the economy has historically moved toward recession or a “growth recession,” a period of sluggish growth with rising unemployment and weak consumer demand. Similar patterns since 1971 support this analysis.
According to Paulsen, the Fed will likely be compelled to lower interest rates. Moreover, central bank Chair Jerome Powell is under significant pressure from US President Donald Trump, who has criticized the Fed for not reducing the cost of capital quickly enough.
Reasons why the Fed could start easing
Concerns about overheated markets remain as the US consumer inflation exceeds the 2% target, and April unemployment rates of 4.2% suggest no signs of economic weakness.
FOMC rates estimate for the Sept. 17 decision. Source: CME FedWatch
Market expectations, as reflected in Treasury yield futures, show a 76% chance of interest rates at 4.0% or lower by Sept. 17. This probability has dropped considerably from 90% on April 29, according to the CME FedWatch tool.
Traders are growing less confident that the Fed will ease monetary policy. While this may initially seem bearish for risk assets, it could prompt the Treasury to inject liquidity into markets to support government spending.
Regardless of the FOMC’s decision, some…
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