Data leaked by the Federal Reserve is telling us that interest rate hikes are likely going to slow down, reducing an expected hike early this year from 50bps to 25bps, as the initially aggressive rate hikes have started to help with inflation. This is an interesting turn of events, as a less hawkish stance will likely cause risk assets such as equities and bitcoin to appreciate, which is what we are beginning to see now.
The inflation target 2% was vastly over shot, resulting in historical levels of more than 9%. The rate hikes helped reduce the inflation numbers, bringing them down to just shy of 6.5%, which is where we are at the time of writing. Despite the fact that we are still a long way from the target, this taste of disinflation (Fed focus), and a pause in hikes, will likely cause risk assets to begin to rise, at least for the time being. This is what has happened historically as well.
One reason for this is that slowing interest rate hikes is good for companies to borrow money, which can lead to increased investment and economic growth. This can in turn drive up the value of stocks, as investors anticipate future profits from these companies. The reason for the less hawkish stance is likely due to the disinflation currently being experienced, the pause in the Federal Reserves previously aggressive rate hikes.
Another factor is that slowing interest rate hikes can also make it less attractive for individuals to save money in traditional savings accounts, leading them to seek higher returns through investments in risk assets such as equities and bitcoin.
Additionally, slowing interest rate hikes can also lead to inflation, which can erode the value of cash and bonds over time (which is what we are currently trying to get out of), making risk assets like equities and bitcoin more attractive as a hedge against inflation. We are still far away from target, but this is how things work. This is what we have recently been experiencing, as inflation numbers continued to creep higher.
It’s important to note that these trends are not always linear and there as other factors influencing the market such as political, economic and social conditions, can sometimes cause the market to take a radical turn in very short order.
It’s also important to remember that investing in risk assets like equities and bitcoin can be volatile and risky, and it’s crucial to conduct thorough research and invest only what you can afford to lose. Why? Well we don’t know if the Federal Reserve was successful trying to bring inflation numbers down, so this may still not be the bottom in risk assets.
In conclusion, the slowing of rate hikes are causing risk assets like equities and bitcoin to move higher due to the increased investment and economic growth, less attractive for individuals to save money in traditional savings accounts, as well as a hedge against inflation. Is this the bottom? We don’t know, but keeping an eye on inflation numbers and trends, as well as CPI figures will certainly give us a clue. Remember, risk assets react quickly to policy changes, so early reactions in risk assets such as Bitcoin and the NASDAQ will give traders an early warning.