Fed may cut rates this year amid inflation concerns tied to Trump
Inflation in the US shows signs of easing, with the personal consumption expenditures price index (PCE) touching 2.6% for the year until May. The Fed’s target rate is 2%, which stood at 2.7% until April.
Meanwhile, strategist Morgan Stanley is betting that apex banks of the US and the European Union will cut rates in September.
Fed can cut rate on the back of slowing inflation
Andrew Sheets, managing director at Morgan Stanley, told CNBC that the bank sees dual rate cuts before the end of summer. Sheets is betting that the labor market and inflation data make it likely for the US and EU central banks to loosen their monetary policies.
Notably, the European Central Bank is being recommended to continue its rate cut spree after its first in about half a decade. Governing Council member Olli Rehn anticipates at least two more cuts this year.
Contrarily, the US inflationary pressure kept the Fed from following suit. However, core PCE value has raised hopes that the Fed could start cutting interest rates. Analysts previously thought that the Fed might wait until December or skip a cut in 2024 altogether.
Recently, Atlanta Federal Reserve President Raphael Bostic pinned a rate cut possibility for Q4.
Trump’s re-election raises a potential economic risk
In a recent letter, sixteen economists expressed concerns about Donald Trump’s potential re-election and its economic impact.
They note,
“We believe that a second Trump term would have a negative impact on the U.S.’s economic standing in the world and a destabilizing effect on the U.S.’s domestic economy.”
They argue that Trump’s “fiscally irresponsible budgets” can reignite inflation, which has been slowing down. In contrast, the economists praised President Joe Biden’s economic initiatives. They believe Biden’s investments will also lower long-term inflationary pressures.
Bitcoin trading range bound despite rate cut hopes
Lower interest rates generally benefit industries and tech firms as money becomes less dear. Moreover, falling rates make treasury bills and bonds less attractive.
At the same time, the market witnesses a rise in investor risk appetite. This change is usually absorbed by alternative assets like Bitcoin. However, this time around, news has failed to mobilize investor funds with Bitcoin’s range bound between $60K and $62K.
The first reason for the indifference is the muted PCE numbers. Also, the inflation figure decreased by 0.1% for the year until May.
When looking at the year-over-year data, from May last year to May this year, prices increased by 2.6%, which is a slight decrease from the 2.7% annual increase observed in April. However, the PCE price index did not change month-on-month.
Additionally, the US dollar has dropped in the week ending June 27. However, its year-to-date gains are over 4% at press time. A sluggish dollar can make gains for Bitcoin, but the broader market strategy is less likely to make that quick an impact.
DXY USD trading chart | Source: TradingView|DXY USD trading chart | Source: TradingView
While a rate cut on the back of low inflation is an anticipated target, the uncertainty of the US Elections and the performance of the USD DXY index will also impact Bitcoin.
Rate cuts could benefit BTC in the mid-term, but the correlation seems to have become non-linear as the market matures.
Cryptopolitan reporting by Shraddha Sharma