The Fed’s Rate Cut Trajectory Remains Intact, Boosting the Crypto Outlook

Over the past few weeks, the interest rate on 10-year U.S. Treasury bonds has significantly increased from 3.6% to 4.1%. This surge is primarily due to a shift in investment strategies by automated fund managers, who have moved their funds from fixed-income securities into stocks. Consequently, as bond prices decreased, yields rose.

As a crypto investor, I’ve noticed that even with the ongoing market rally, naysayers in the stock market are attempting to seize the moment. They’re tugging at every string, trying to argue that the upward trend can’t continue. However, they seem to be overlooking the grand narrative unfolding.

Recently, discussions have centered around why it’s challenging for our central bank to lower interest rates. A few weeks ago, the newly elected Japanese government was determined to tighten monetary policy, making it inappropriate for us to reduce rates to keep our bonds appealing. Last week, the economy showed signs of overheating as payroll growth surpassed expectations, suggesting that easing measures could lead to inflation.

The initial claim about raising interest rates in Japan was swiftly countered when the newly appointed prime minister stated that the economy is not yet prepared for such increases at this time.

This week, the pessimists made their predictions again. They claimed that the unexpected rise in the Consumer Price Index (CPI) for September ruled out any possibility of rate reductions. However, as before, they seem to overlook the bigger picture. If we consider long-term perspectives instead of short-term expectations, it becomes clear that the long-term inflation trend is gradually decreasing. This suggests that our central bank will have ample opportunity to reduce interest rates deep into next year, which should strengthen a continuous upward trend in risky assets such as cryptocurrency.

But don’t take my word for it, let’s look at what the data’s telling us.

According to the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) grew by 2.4% in September, slightly higher than the anticipated 2.3%. However, when compared to August’s 2.5% increase, this growth indicates a step towards reduction rather than an escalation.

In the graph provided, you’ll find that the growth rate of CPI (Consumer Price Index) hit its lowest point since February 2021 yesterday. Moreover, it appears the CPI is closing in on its pre-pandemic values.

But let’s drill down a little further. Let’s look at the monthly growth trend on a quarterly basis.

Looking at the graph provided, it’s evident that the price trend seems to follow a distinct pattern throughout the year. From January to March, we observed an average increase in CPI of about 0.6%. In the period from April to June, the rate of increase slowed down to approximately 0.3%. For the final three months, the growth has remained relatively stable at around 0.1%, indicating a gradual deceleration in price rise.

Instead, let’s revisit the pattern that has emerged over the past couple of years. This will help us determine if the current activity appears to be an anomaly.

To put it simply, the pace at which inflation increases month by month appears to decelerate as we progress through the year since 2021. Furthermore, as we distance ourselves from the influence of COVID-19 stimulus measures, this decrease in inflation seems to be happening more rapidly.

Our graph indicates that inflation rates tend to rise most vigorously during the first half of the year (first and second quarters). However, by the third and fourth quarters, inflation can decelerate significantly, even approaching a standstill. Interestingly, in the last quarter of 2022, there was no inflation growth at all, while the end of the previous year witnessed a decrease in Consumer Price Index (CPI). This suggests that inflation growth may slow further over the next three months.

We’re interested in determining if economic patterns are starting to resemble those prior to the pandemic. If so, this could indicate that the Federal Reserve might adjust interest rates towards their usual levels. Therefore, let’s examine how the rate of monthly growth has varied over the past few years compared to the pre-pandemic average.

During the period of 2021-2022, when inflation rates were escalating significantly, the average monthly increase was approximately 0.6%. To put it another way, the Consumer Price Index (CPI) grew by roughly 7.2% each year. However, as interest rates climbed, the rate of monthly growth began to decelerate. In 2023, the typical month-to-month growth was around 0.3%, which translates to a 3.6% annual growth rate, or 2.4% when considering year-to-date figures. By analyzing data from 2009 through 2019, prior to the COVID-19 pandemic, I discovered that inflation increased by slightly more than 0.15% per month.

According to the data, it seems that inflation might be moving back towards its typical, pre-pandemic rates. To forecast future trends, I’ve calculated the potential yearly growth if this pattern continues…

According to the data, the Consumer Price Index (CPI) might drop below the Federal Reserve’s 2% target as early as February. This means that in approximately five months, the central bank could nearly reach one of its main objectives since it started increasing rates in March 2022.

Instead of focusing on whether or not the Federal Reserve has space to reduce interest rates, let’s consider that the current effective fed funds rate is 250 basis points lower than the annualized Consumer Price Index (CPI) growth rate, as indicated by the September data release.

This figure is among the greatest we’ve seen since the year 2000. What’s more significant is that it indicates the Federal Reserve still has room to reduce interest rates by an equivalent amount without impacting inflation becoming less of a concern.

Essentially, as mentioned earlier, market pessimists are making every effort to drive down stock prices. However, their ultimate goal is to make investors focus on the commotion rather than the underlying indicators.

At present, financial analysts predict that interest rates will decrease from their current level of 4.9%, down to 3.4% by October of the following year. With the data we’ve examined, the Federal Reserve has ample opportunity to make this adjustment immediately. Even after reducing rates, it would still maintain a buffer of around 100 basis points.

Rather than using up resources unnecessarily, let’s give our central bank some leeway to act thoughtfully, saving its resources for critical moments. This strategic move aims to foster sustained economic expansion and encourage a continued rise in digital currencies such as Bitcoin and Ether.

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