Central Bank Watch: What Would No Fed Rate Cut This Year Mean for Crypto

See-sawing expectations of when the Federal Reserve will cut rates have weighed on risk assets in between significant bull runs.

For now, traders are still calling for at least two Fed rate cuts this year, according to the CME FedWatch tool.

But that is down from six cuts predicted at the start of the year, with a real possibility of no Fed easing this year.

With just three basis points of cuts priced by June, 20 basis points by September, and 36 basis points by December, markets are now pricing practically no likelihood of any action on 1 May.

Fed's Rate Path Bets

This is quite a turnaround, considering the market had already priced at 150 basis points for a rate reduction this year, beginning at the March FOMC meeting.

The risk is that the Fed may lower interest rates only next year and even then to a more neutral level more slowly and over a longer time than markets anticipate.

What does that mean for faltering cryptos?

Digital tokens need a boost to rise further after the tremendous surge over the past year and the record high in March.

With the demand for Bitcoin ETFs falling, the trading patterns currently align with the expectations for two Fed rate cuts, with the $60,000 plus price for Bitcoin baking in those predictions.

Any change to the Fed rate path will weigh heavily on crypto prices despite broader Bitcoin ETF debuts in countries outside of the US.

During the March FOMC meeting, the Fed maintained its position that three 25 basis point interest rate cuts in 2024 and three more in 2025.

Although these projections will be revised in June, Wednesday's FOMC news conference is likely to adopt a more cautious approach to the likelihood of policy easing due to the persistently high inflation and continuing economic growth.

All eyes will be on what Fed Chair Jerome Powell says on recent inflation data after he dismissed higher prints in previous months as temporary.

That feels like Deja Vu for investors, who have seen this scenario play out when the Fed dismissed rising inflation as a "transitory trend" in 2021 and then forced to resort to aggressive rate hikes to fight elevated price pressures.

This is another reason why the Fed will be extra cautious in bringing rates down before inflation does.

Historically, the Fed has not waited longer than the current period, barring twice, before easing rates (see chart below).

US Inflation Still Too Hot

When deciding on interest rates, Federal Reserve officials consider the bond market's inflation prediction.

What dealers are indicating right now might be troublesome.

Benson Durham, Piper Sandler's head of global asset allocation and a former Federal Reserve economist, comes to the same conclusion.

He uses his adjusted measure of long-term inflation expectations as evidence that price pressures will persist into the future; this measure has risen over the past several months and is now above the Federal Reserve's 2% objective.

According to Durham, central bankers risk seeing these expectations feed real inflation. If they persist, the Fed may respond by raising interest rates.

UBS, too, has called for Fed rates to rise by another 100 basis points before they can start to fall.

While the base case scenario predictions are for two rate cuts this year, Strategists at UBS say the Fed hiking rates to 6.5% is 'Real Risk.'

The robust US economy drives that and hotter-than-expected inflation prints in recent months.

While cryptos rose even as the Fed hiked rates previously, the pricing and expectations for any further leg up are driven more by a pivot.

So, if the Fed decides to wait beyond this year or does something else, the crypto market could take a deep hit.

Different Story Across the Atlantic?

The European Commission's economic sentiment indicator unexpectedly declined in April due to a still struggling manufacturing sector. Selling price expectations softened in most sectors, suggesting that a June rate cut is still on the cards.

The second quarter for the eurozone got off to a slower start than the first, but after two-quarters of GDP loss, the first quarter probably witnessed a modest increase.

As the inventory adjustment is expected to conclude by summer and real disposable income rises due to reduced inflation, driving household spending, a slow recovery is still visible.

The data on inflation were much better. Selling price expectations decreased in all sectors except construction. However, as this indicator is still above its long-term average for all sectors except industry, it is still too soon to claim that the inflation battle has been won.

Tuesday's data shows that the euro zone's economic recovery remains a stop-and-go affair, at least for now.

As markets believe that the subdued recovery will likely continue, the speed of the disinflation process will be the defining factor for monetary policy.

While a June rate cut has been advocated so strongly, and Tuesday's data didn't include any nasty inflation surprises, it seems sure to happen.

However, with US interest rates unlikely to be cut anytime soon and selling price expectations in the euro zone still mostly above their long-term average, the European Central Bank's monetary easing will likely proceed at a snail's pace.