After the steepest interest rate hikes in history, the Federal Reserve recently signaled it might soon adjust policy. Markets expect a 25 basis point cut at the upcoming September meeting, with more cuts likely to follow into 2025.
Several assets are likely poised to benefit from these adjustments, but one in particular is positioned best in this evolving landscape. Here's why Bitcoin (CRYPTO: BTC) is the one asset investors should keep an eye on as the Fed turns from hawkish to dovish.
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The current landscape
Although people celebrated Federal Reserve Chair Jerome Powell's announcement that rate cuts will be coming, there's reason to be less optimistic. Based on recent data and developments, the decision to cut rates seems to have been driven by concerns like the recent yen carry trade and the Bureau of Labor Statistics' revision, which revealed a significant overcounting of 818,000 jobs. These developments stoked fears of fragility in the global economy and a weakening labor market, ultimately prompting the Fed to consider easing its stance.
However, the inflation rate is still 2.9%, well above the Federal Reserve's long-stated 2% target, and one Powell had previously declared non-negotiable. Additionally, the U.S. economy remains relatively robust. Since the COVID-19 pandemic, the U.S. has only seen two quarters of negative real gross domestic product ( GDP ) growth, a key metric for measuring economic productivity. Furthermore, the latest third-quarter 2024 real GDP estimate is a solid 2%. This suggests the economy isn't struggling under overly restrictive monetary policy.
It isn't hard to see how rate cuts could cause inflation to tick up again in this scenario. Lowering interest rates encourages borrowing and spending, which boosts demand for goods and services. This increased demand in an economy that appears healthy exerts additional upward pressure on prices and further complicates the Federal Reserve's efforts to maintain price stability.
Bitcoin: The premier asset
While increased liquidity and lower interest rates often lead to greater growth in equities as investors are incentivized to take on more risk, in this environment, I'd prefer a different asset: Bitcoin.
Considered the premier risk-on asset, Bitcoin has proven it thrives when there's more liquidity in the market. From when the Fed slashed rates to near zero in February 2020 to February 2022, when rate hikes resumed, Bitcoin saw a staggering 375% jump. Its performance in that low-rate environment underscores its potential as rates begin to fall again.
But the primary reason Bitcoin is so attractive today isn't just about benefiting from increased liquidity; it's about safeguarding against inflation. In an economy that doesn't appear to be struggling, the likelihood of inflation returning is significant. After the U.S. dollar lost 20% of its value over the last five years, I have no interest in returning to that scenario.
Fortunately, Bitcoin offers a solution. With a fixed supply of 21 million coins, of which 19.6 million are already in circulation, Bitcoin offers a unique hedge against central bank malpractice and government intervention. Its decentralized nature means it isn't controlled by any single entity, and its underlying blockchain technology ensures security and transparency. These characteristics make Bitcoin not just a speculative asset, but a robust store of value in an uncertain economic landscape.
Final considerations
The Federal Reserve's rate cuts have been a long time coming and will certainly boost the economy. But that doesn't necessarily mean there won't be potential consequences or other issues that arise.
If economic growth can somehow be managed with minimal inflation, then kudos to Powell. But with no guarantees, I'd rather put my trust in the most decentralized, secure, and finite asset in existence.
For investors looking to navigate these choppy waters, Bitcoin represents not just a speculative play, but a strategic allocation in a world where traditional assets are increasingly subject to the whims of central banks.
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RJ Fulton has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy .
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