Did The FED Do The Impossible? [Huge Implications For Bitcoin]

Lark Davis

Introduction to the Economy and Recession Fears

The Federal Reserve's handling of interest rates has led to predictions of a recession, but recent data suggests a potential bull run. Experts had predicted a recession by 2025 or 2026 due to factors like interest rates and the inverted yield curve.

Interest Rates and Their Impact

  • The Federal Reserve uses interest rates to control inflation.
  • High interest rates can slow down the economy by making borrowing expensive, potentially leading to a recession.
  • The last interest rate hike was in July 2023, and historically, a recession starts about 17 months after the last rate hike.

Inverted Yield Curve

  • An inverted yield curve occurs when short-term interest rates are higher than long-term interest rates.
  • This phenomenon often precedes a recession, but the longest inverted yield curve in history recently ended, which could indicate a recession is near.

Other Factors

  • The SAM rule, which signals a recession when the national unemployment rate rises by 0.5 percentage points over its low in the previous 12 months, was triggered but may be a false signal due to low unemployment.
  • The concept of a "soft landing" refers to the Federal Reserve slowing down the economy to control inflation without causing a recession.

Current Economic Data

  • The U.S. economy is growing, with a GDP growth rate of 3.1% in the third quarter of 2024.
  • Unemployment is near record lows at 4.1%.
  • Consumer spending increased by 3.7% in the third quarter of 2024.

Inflation

  • Inflation is still a concern, with the latest CPI report showing a 0.4% increase in December 2024, bringing the 12-month index to 2.9%.
  • Core inflation and purchaser inflation are lower, but producer prices are still rising, indicating potential stabilization of inflation.

Impact on Crypto Investors

  • A strong economy with acceptable inflation rates is beneficial for risk asset investors, including those in cryptocurrencies.
  • The Fed is likely to cut interest rates further, making borrowing cheaper and potentially increasing investments in cryptocurrencies.

Risks and Considerations

  • The economy could overheat, leading to increased inflation and potential rate hikes.
  • Historical correlations between economic indicators (like the ISM Purchasing Managers Index) and Bitcoin cycles suggest there might be room for growth before a peak.
  • Political factors, such as a crypto-friendly administration, could also support the cryptocurrency market.

Conclusion

  • While there are indications of a strong economy and potential for growth in the cryptocurrency market, there are also risks of inflation and market volatility.
  • Investors should be prepared for turbulence but may see upside in the market based on current data and historical trends.