The FOMC meeting on May 7 will likely impact crypto markets, with potential for a Bitcoin rally due to increased liquidity measures. Analysts note a weakening dollar and inflationary concerns as encouraging factors. Despite a reduced expectation of rate cuts, cryptocurrencies could benefit as investors seek safer asset alternatives amid economic uncertainty.
The upcoming Federal Reserve Open Market Committee (FOMC) meeting on May 7 is poised to impact risk-on assets like cryptocurrencies in a significant way. Although many anticipate no changes to existing interest rates, Bitcoin and other altcoins could see upward momentum if liquidity measures are enacted to fend off a looming recession. Overall market sentiment leans towards a potential rally in cryptocurrencies as a hedge against economic downturns, especially given the backdrop of a weakening US dollar.
Analysts have been eyeing how accommodative monetary policies might accelerate economic activity, but the Fed faces challenges as the dollar falters. Some experts argue that slashing interest rates may not provide the intended stimulus to growth, due to persistent recession risks. In this light, cryptocurrencies may present an attractive alternative for investors seeking safer assets amid financial uncertainty.
Economist Jim Paulsen points out a historical trend where when Fed funds exceed the so-called “neutral” rate—the Fed Funds rate minus the annual core Personal Consumption Expenditures index—the economy tends to slip into recession or experiences “growth recession.” Such economic conditions, combined with rising unemployment and diminished consumer spending, have been observed multiple times since 1971.
In this context, it seems plausible that the Federal Reserve might have to reduce interest rates soon. There’s added pressure from none other than President Donald Trump, who has publicly critiqued the Fed for not acting swiftly enough to lower capital costs, which only amplifies the urgency for policy adjustments.
There are ongoing concerns about overheated markets as inflation in the US hovers above the target of 2%. At the same time, the unemployment rate as of April sat at 4.2%, which suggests the economy isn’t showing signs of weakness just yet. Market indicators, particularly Treasury yield futures, hint at a 76% likelihood that rates will settle at 4.0% or lower by mid-September—down from about 90% just a week ago.
However, despite a growing lack of confidence in Fed easing, this reality could prompt a liquidity infusion through the Treasury, thereby supporting government spending. There’s also a notable move by the Fed on May 5 with its $20.5 billion purchase of Treasury bonds, which hints at a renewed strategy of market intervention. Historically, increased liquidity has spurred positive trends in cryptocurrencies, especially under current conditions where the dollar is struggling against other major currencies.
In the broader market, the US Dollar Index (DXY) has dipped below 100, which is its lowest since July 2023. This decline showcases a retreat from US markets amidst prevailing uncertainties. At the same time, gold prices have surged by over 12% in the past month, now standing just 2% shy of the all-time high around $3,500. As investors grow wary of the US Treasury’s ability to manage its debts, more are now turning towards scarce and stable assets like Bitcoin.
While the odds of multiple interest rate cuts have lessened recently, this scenario can still provide tailwinds for cryptocurrencies in the future. If the Fed feels compelled to expand its balance sheet, it may ignite inflation, eroding the value of fixed-income investments—this, in turn, could further bolster cryptos as an alternative store of value.
