Stocks and Bitcoin Dip as Hawkish Fed Remarks Rattle Markets

Stocks and cryptocurrencies, led by Bitcoin (BTCUSD), slid on Thursday following hawkish comments from Federal Reserve Chair Jerome Powell. Investors, who had anticipated further interest rate cuts by the year-end, pulled back in response to Powell’s assertion that the Fed is not “in a hurry” to lower rates. The Fed Chair’s hawkish remarks have temporarily pumped the breaks on the post-election Trump trade rally, with Bitcoin and all three major US indices trading lower on Thursday.

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Powell’s Remarks Shift Rate Cut Expectations

At a Dallas conference, Powell conveyed a cautious tone, suggesting that the US economy remains strong enough to forgo aggressive rate cuts.

Addressing the financial community’s expectation of further rate reductions, Powell said:

“The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”

His remarks shifted market sentiment as investors recalibrated their outlook for December, with the likelihood of a 0.25% rate cut dropping from 80% to 62.6%, according to the CME FedWatch tool.

US markets reacted swiftly to Powell’s remarks. The S&P 500 Index (SPX) dropped 0.6%, erasing gains from the Fed’s rate cut on November 7, while the Dow Jones Industrial Average (DOWI) and NASDAQ Composite (NASX) both slid by 0.47 and 0.64%, respectively. Many traders had hoped that the Fed would continue to ease its monetary policy, providing a cushion for stocks and risk assets. However, Powell’s comments, paired with recent inflation data, indicate a slower, more calculated approach.

Tom Cahill, chief investment officer at Ventura Wealth Management, explained:

“The inflation data this week and the Fed Chair’s remarks have pushed down the expectations of a rate cut in December. That’s what’s troubling the market.”

Source: CNBC Television YouTube

Bitcoin Retreats After Record High

The cryptocurrency market followed suit, with Bitcoin trading below $88,000, marking a decline of over 4% from its recent high of $93,462. This correction came on the heels of a powerful rally post-election that had pushed Bitcoin close to the long-anticipated $100,000 mark. Analysts had been bullish on Bitcoin’s trajectory, with many expecting the cryptocurrency to breach six figures soon, driven by factors such as renewed institutional interest and increasing spot ETF demand.

However, Powell’s hawkish tone cast doubt over Bitcoin’s inflation-hedging appeal in the short term. Bitcoin, often viewed as a hedge against inflation and currency devaluation, now faces potential headwinds if inflation expectations temper and interest rates remain steady.

Secure Digital Markets noted Bitcoin’s volatile trading within a narrow band before it ultimately slipped on Thursday, stating:

“Bitcoin was hanging out in the 89,000 to 91,000 zone this morning before dropping to 88,300 after the U.S. market open,” the firm reported, adding that Bitcoin could soon test support at $87,000.

View Bitcoin Interactive Stock Chart on Barchart

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Economic Strength as a Double-Edged Sword

Despite the downturn in risk assets, Powell highlighted the US economy’s resilience, pointing to productivity gains and labor market stability.

Powell stated that productivity had “grown faster over the past five years than at any point in the two decades preceding the pandemic,” calling the US economy “the best-performing among major economies.” This growth, while encouraging, could prompt the Fed to maintain a conservative approach to rate cuts, making the path ahead uncertain for markets betting on continued monetary easing.

The US Producer Price Index (PPI) report, released just before Powell’s remarks, indicated a 2.4% annual increase, slightly exceeding forecasts and suggesting that inflationary pressures remain. The PPI data reinforced Powell’s stance, providing additional justification for holding off on immediate cuts. Many investors view this approach as potentially detrimental to asset prices in the short term but beneficial for overall economic stability in the long term.

Patrick O’Hare of Briefing.com stated:

“The higher interest rates, I think, are kind of acting as a headwind of sorts for the equity market right now.”

This sentiment is gaining traction among traders who are beginning to question the durability of the “Trump Trade” rally that initially drove market gains.

Crypto’s Institutional Momentum Meets Fed Roadblocks

The pullback has left many crypto investors and traders assessing how the Fed’s policies might impact Bitcoin’s long-term trajectory. Despite the short-term correction, some analysts remain optimistic about Bitcoin’s upward path, especially with the recent boom in spot ETF inflows and institutional demand. Bitcoin ETFs, such as iShares Bitcoin Trust ETF (NASDAQ: IBIT), Grayscale Bitcoin Trust ETF (NYSE Arca: GBTC), Proshares Ultra Bitcoin ETF (NYSE Arca: BITU), and Vaneck Bitcoin ETF (NYSE Arca: HODL) saw a significant inflow this past week, raking in $510 million on Wednesday alone, bringing the week’s total to a staggering $4.7 billion.

Matthew Sigel, head of digital assets research at VanEck, remains confident about Bitcoin’s potential to climb to $180,000 by 2025, bolstered by growing institutional participation.

Emphasizing that Bitcoin’s rally could gain additional momentum as retail demand intensifies, Sigel told CNBC:

“Our target is $180,000. We think we could reach that next year. That would be a 1,000% return from the bottom to the peak of this cycle.”

Sigel compared the current market setup to Bitcoin’s post-2020 election rally, noting:

“We think it’s just getting started. As we expected, Bitcoin saw this high volatility pump after the election. We are now in blue sky territory, no technical resistance. It is not going to be a straight line, but we are up 30% so far, and a number of indicators that we track are still flashing green for this rally to continue.”

The price of bitcoin rose above $90,000 and @matthew_sigel says the rally is just getting started. “We’re likely to make repeated all-time highs over the next two quarters,” he says. pic.twitter.com/P2roCnFNaE

— Squawk Box (@SquawkCNBC) November 14, 2024

A Balancing Act Between Risk and Stability

As markets await the Fed’s December decision, Powell’s recent comments reflect the complex balancing act between fostering economic growth and managing inflation. His reluctance to commit to further cuts is a stark reminder of the Fed’s cautious stance amid ongoing inflationary pressures.

The outlook for stocks and Bitcoin remains mixed, with investors weighing the prospect of slower rate cuts against the potential benefits of the Fed’s steady hand in economic policy. As Secure Digital Markets noted, Bitcoin’s current rally “is all about the spot market—which is a bullish sign” but is being tempered by macroeconomic signals from the Fed. For now, the market waits, with Powell’s words leaving an unmistakable mark on the road ahead.

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Disclaimer: Wealthy VC does not hold a position in any of the stocks, ETFs or cryptocurrencies mentioned in this article.

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