According to the Federal Reserve's latest quarterly economic forecast, there may only be two rate cuts in 2025, significantly lower than the four cuts predicted in September and below the market's prior expectation of three. This suggests that the Fed is adopting a more cautious approach to balancing inflation with economic growth. Additionally, the Fed raised its forecast for personal consumption expenditure (PCE) inflation and core PCE inflation in 2024, increasing them from September’s estimates of 2.1% and 2.2% to 2.5%.
Fed Chairman Jerome Powell described this shift as a "new phase" of monetary policy, noting that after a projected 100 basis point rate cut in 2024, interest rates are now much closer to a neutral stance.
Market Reaction: Stocks Plummet, Risk Aversion Rises
In response to the Fed's policy signals, all three major U.S. stock indexes fell sharply. By the close of trading on Wednesday, the Dow Jones Industrial Average was down 2.59%, marking its 10th consecutive daily decline and setting a 50-year record for the longest losing streak. The S&P 500 fell by 2.95%, and the Nasdaq dropped by 3.56%. Meanwhile, the U.S. dollar surged to a two-year high, and the Chicago Board Options Exchange Volatility Index (VIX), often referred to as the "fear gauge," spiked 58% to 25, reflecting heightened investor uncertainty and anxiety over future interest rates.
Bitcoin Plunges as Powell Rebukes Trump’s "Strategic Reserve" Proposal
Following the release of the Fed's statement, Bitcoin’s price quickly plummeted from $104,000 to $100,256, representing a near 5% drop within 24 hours. Other cryptocurrencies suffered even larger losses, with XRP, ADA, and LTC all falling by nearly 10%.
This sharp decline is closely linked to comments made by Fed Chairman Jerome Powell. During the press conference, when asked about former President Donald Trump’s idea of creating a "strategic Bitcoin reserve," Powell stated bluntly: "The Federal Reserve is not allowed to hold Bitcoin. The Federal Reserve Act specifies what assets we can hold, and we do not intend to advocate for changing the law. That’s something for Congress to decide."
Trump has repeatedly expressed his vision of establishing a national Bitcoin reserve. In an interview with CNBC last week, he remarked, "We will accomplish great things in the cryptocurrency space because we don’t want any other country to embrace cryptocurrency before us. We want to lead the way."
Some lawmakers have supported this idea. For instance, Republican Senator Cynthia Lummis from Wyoming is drafting legislation that would instruct the U.S. Treasury to purchase 1 million Bitcoins over five years. The funding for this purchase would come from Federal Reserve bank deposits and gold reserves.
However, the proposal has faced criticism. Former New York Fed President Bill Dudley argued in a Bloomberg opinion piece last week that such a strategy would be a "bad deal" for Americans. A Barclays Bank analysis also noted that funding a strategic Bitcoin reserve might require issuing new Treasury bonds, which could face strong resistance from the Federal Reserve.
Global Perspective: Bitcoin Reserves More Likely in Asia or the Middle East
While the idea of a "strategic Bitcoin reserve" has sparked widespread discussion in the U.S., Zach Pandl, Head of Research at Grayscale Research, believes that sovereign wealth funds in Asia and the Middle East are more likely to drive Bitcoin adoption. He stated, "Fed Chairman Powell’s comments disappointed investors regarding the theoretical possibility of a Bitcoin reserve. However, sovereign wealth funds, which manage highly diversified portfolios, are more likely to take the lead in adopting Bitcoin."
Andre Dragosch, Head of Research at Bitwise Europe, also noted, "Although the Fed is cutting rates, financial conditions remain tight. The strengthening U.S. dollar poses a macroeconomic risk to Bitcoin, as dollar appreciation is often accompanied by a contraction in global money supply, which is unfavorable for Bitcoin and other crypto assets. Moreover, the Fed’s net liquidity continues to decline, further pressuring Bitcoin."
That said, Dragosch highlighted that Bitcoin’s on-chain data remains favorable. The continuous decline in exchange balances suggests that the supply shortage could intensify, providing support for long-term prices.
Technical Analysis and Short-Term Outlook
From a technical perspective, Bitcoin needs to find support near the $100,000 level in the short term. Crypto analyst Skew stated that long and short positions are battling fiercely, with significant stop-loss liquidations for long positions and profits for short positions. If Bitcoin can reclaim the $100,000 to $101,400 range and establish stability on the daily chart, it could reverse its downward trend.
Santiment analysts remain optimistic. On X (formerly Twitter), one analyst stated, "Bitcoin, despite its short-term decline, remains above $100,000. Compared to the S&P 500’s losses, the drop is relatively moderate. If the price stabilizes within the next 24 to 48 hours, it could actually be interpreted as a sign of strength."
Conclusion
The Fed's policy adjustments are having a profound impact on global financial markets and cryptocurrency markets. While uncertainty about future interest rates and the strengthening U.S. dollar continue to weigh on Bitcoin and other crypto assets, long-term factors such as sovereign wealth fund adoption and supply-demand dynamics may provide support. Market participants will closely watch future developments.
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