Rate Hikes to Pause Soon, Will Crypto Finally Breakout? | Weekly Digest
Welcome to another Crypto Weekly Digest brought to you by VirtualBacon.
Our primary focus will be on the details of the recent FOMC meeting, analyzing the outcomes and their implications on both the economy and the cryptocurrency market. We'll provide thorough insights and predictions in light of the ongoing speculations surrounding future rate hikes. Additionally, we'll have a recap from the live stream from earlier this week on Worldcoin, offering a concise overview of it is and its functional attributes.
FOMC Meeting Summary
In this section, we'll summarize the latest Federal Open Market Committee (FOMC) meeting, demystifying the decisions and their expected repercussions. We'll discuss the anticipated and actual rate hikes, the highest interest rates since 2001, and the Fed's strategy in tackling inflation.
https://www.cnbc.com/2023/07/26/fed-meeting-july-2023-.html
The meeting witnessed an expected rate hike of 25 basis points, matching prior anticipations. This has driven interest rates to 5.5%, a level not seen since 2001. Despite inflation trending downwards to 3% in the past year, it's still yet to hit the Fed's 2% target. The Fed's rate-raising strategy has gradually decelerated, moving from 75 basis points per meeting, to 50, and currently at 25. Moving forward, the Fed aims to space out these hikes, indicating a nearing peak of interest rates.
This is the 11th time rates have been raised since the tightening process began in March 2022. Notably, the committee skipped the June meeting to evaluate the hikes' impacts. Despite recent progress, Fed Chair Powell still considers inflation too high, suggesting potential 'restriction' in monetary policy, hinting at more increases ahead.
Market and Bitcoin Reactions: Rate Hike Analysis
Now we will assess how the market and Bitcoin have responded to the recent rate hike. We'll explore the market speculations and look into Bitcoin's performance, painting a clearer picture of the current financial landscape.
Despite high interest rates, markets remain optimistic about assets like Bitcoin. Most investors had already braced for the 25 basis points hike, hence the market stability post-meeting. Economic impacts, such as reduced consumer spending and business challenges, haven't deterred market speculators, especially with the rate hikes slowing down. The markets are forward-looking, anticipating the rate hikes' conclusion and thereby acquiring assets early. Consequently, Bitcoin's value remained fairly stable following the meeting.
On July 26, Bitcoin's daily timeframe chart showed a modest increase, and nearly reclaiming the $30,000 price range, a level it previously lost. As of this writing, it was trading at $29,298.
Inflation Data and Powell's Speech
Let’s turn our focus towards the ever-important inflation data and the recent declarations by Jerome Powell, chair of the Federal Reserve. We dive into the intricacies of his message and the implications of the dwindling inflation.
Annual inflation, having peaked at 9% in June 2022, has been on a steady decline, reaching 3% by June 2023, edging closer to the Fed's 2% target. This trend, along with the lack of surprises in the FOMC meeting, has allowed markets to maintain stability and retain risk-on assets such as equities and Bitcoin.
Jerome Powell's speech provided subtle hints towards a more dovish Fed stance. Unlike his last FOMC meeting, Powell did not confirm another rate hike for the September meeting, stating a possible increase only if data warrants action.
Monetary policy decisions are set to become more data-dependent, meeting-by-meeting.
Despite this, Powell acknowledged the declining inflation and dispelled forecasts of a looming recession.
However, he emphasized the need to soften the tightly wound labor market before concluding the rate hike cycle. The employment-to-inflation inverse correlation suggests a cooling labor market will result in falling wage inflation, hence ending the tightening cycle. Powell concluded with a promise of data-driven decisions, making the upcoming jobs reports crucial to watch.
Predictions for Future Rate Hikes, Pauses, and Potential Cuts
Drawing our attention to future actions by the FED, lets look at market predictions around potential rate hikes, possible pauses, and subsequent cuts. These forecasts give an inkling of what we might expect in the coming months and their potential impact on the economy.
Three more FOMC meetings are due this year, with expert opinion predominantly indicating that interest rates may have peaked at 5.5%, or 550 basis points. A minority, representing 20-30% of analysts, speculate an additional hike, potentially pushing rates up to 5.75% by the end of 2023.
Looking forward to 2024, a consensus emerges among analysts predicting easing to begin between March and July, with rate cuts likely by the September 2024 meeting. Reflecting on the past, a pause of nine months in rate hikes preceded the last cycle of rate cuts.
If this pattern holds, we can anticipate rate cuts beginning in July 2024 if the final hike occurs at the end of 2023.
This future trajectory is likely to be influenced by a potential economic break, such as a change in the labor market's current strength, which could trigger earlier easing in the first half of 2024. This illustrates the balancing act of maintaining current rates until a significant shift in economic indicators takes place.
Future Rate Hike Timeline
Now let’s have a look into the predictions for when interest rates might peak, how long the pause could last, and when we might see the eventual rate cuts. Let's see what the experts forecast for the coming months.
By consensus, interest rates are expected to peak this year, either at the current 5.5% or possibly at 5.75% after the FOMC meetings in September, November, or December. With these expectations, we could be looking at one more hike still to come.
Once rates reach their peak, a significant pause of up to nine months is anticipated, marking the longest scenario before easing commences post-July 2024.
However, shorter timeframes are also plausible if an economic downturn, such as a labor market contraction, prompts the FED to intervene earlier. In this instance, a pause lasting four to five months could lead to interest rate cuts as early as March 2024.
In terms of analyst predictions and the image in the previous section, only about 22% anticipate easing in January 2024, while 45% foresee it in March. Predictions for easing to commence in May, June, and July were approximately 76%, 83%, and 93%, respectively.
Worldcoin: A Look at the New Global Initiative
Switching gears now, let's delve into a topic we unpacked in our livestream earlier this week - Worldcoin. A global financial initiative with a twist, Worldcoin aims to lay the groundwork for universal access to the global economy. Today, we'll take a closer look at what it is, why it's necessary, and potential challenges that lie ahead.
Worldcoin presents itself as a project with a goal to create global economic accessibility. It rests on three pillars - World ID, the World App, and the Worldcoin token. World ID utilizes zk technology to create an anonymous global ID system, aiming to assign every individual a unique identity. This works in tandem with the World App, a financial application that integrates this ID with a payment system. Finally, Worldcoin is a token that the project claims is designed as a universal basic income (UBI).
Worldcoin cites two primary justifications for its existence, both connected to the rapid advancement of AI. The first concern is protection against sybil attacks, a type of online threat where a single attacker could generate multiple pseudonymous identities. The second issue is curbing the spread of AI-generated misinformation. Worldcoin’s 'Proof of Personhood' attempts to address these issues, offering a mechanism to authenticate each individual's uniqueness and humanness online. While the initiative aims to establish a unique yet anonymous identity system with potential social benefits, the implementation of such an ambitious project might encounter challenges related to privacy and security. As always, it's a matter of wait and watch to see how Worldcoin navigates these potential obstacles in its pursuit of the stated objectives.
Potential Challenges Worldcoin Faces
Let’s have a look into a critical perspective of Worldcoin, as Ethereum's co-founder, Vitalik Buterin, expressed some noteworthy concerns about its design and operation.
Vitalik Buterin, the prominent figure behind Ethereum, raised four significant issues around Worldcoin's design in a blog post. Privacy is his first worry, where the act of iris scanning could expose more data about an individual than intended. Next, accessibility comes into the spotlight; the scarcity of Orbs makes it hard for everyone wanting a World ID to acquire one, potentially creating accessibility disparities. Centralization, another grave concern, arises due to potential backdoors in the Orbs hardware, enabling bogus identities. Finally, Buterin touched on the broader issue of security, indicating risks of AI manipulations or identity thefts. Despite these reservations, Buterin acknowledges the enormous task Worldcoin has undertaken, reiterating that developing a robust proof-of-personhood system won't be a walk in the park.
This was just a brief overview of Worldcoin. If you missed the deep dive we did during a livestream, make sure to check it out below:
Conclusion
As we look ahead to what 2024 might bring, we can't ignore the diverse array of factors that could contribute to its unique character. From a probable shift in Federal Reserve policy with potential rate cuts on the horizon to the highly anticipated Bitcoin halving event and the possible approval of the Bitcoin spot ETF, Bitcoin's journey appears promising. Simultaneously, emerging initiatives like Worldcoin aim to add a new layer to the crypto ecosystem, albeit with several inherent challenges. While its approach to proof-of-personhood could offer a meaningful step towards building a global network of unique human identities, the hurdles it needs to overcome should not be underestimated. In this complex weave of scenarios, one thing is certain: the realm of cryptocurrencies continues to evolve, offering thrilling opportunities and notable challenges alike. As always, keeping a keen eye on developments and preparing for various scenarios is critical in this dynamic environment.
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