Expected interest rate cuts from the Federal Reserve are supporting Bitcoin bulls, but there is a problem

Minutes from the Federal Reserve's December meeting were released on Wednesday show up Interest rates are likely to be lowered in 2024.

The long-awaited liquidity relief has been widely touted as a crucial upside tailwind for Bitcoin (btc) Along with the imminent immediate launch of the ETF and the halving of the Bitcoin blockchain mining reward.

There is a catch. Previous data from MacroMicro shows that the early stages are supposed Motivational The Fed's rate-cutting cycle is often characterized by an economy on the brink of recession and a brief but noticeable surge in the U.S. dollar, a global reserve currency backed by the world's largest and most liquid government bond market.

In other words, if history is any guide, Bitcoin could see a brief and intense bout of risk aversion later this year after the Federal Reserve begins cutting its benchmark federal funds rate.

A recession is a long period of declining economic output and high unemployment rates. If left to market forces, a recession could lead to a sharp decline in investors' ability to take risks and a contraction in asset prices. Hence, central banks often combat the same through monetary stimulus.

The dollar is a global reserve currency, with Huge role In global trade, international debt and non-bank borrowing. When the US currency appreciates, those who borrow in dollars face higher debt servicing costs. This tightens financial conditions, causing investors to reduce exposure to risky assets like Bitcoin.

The dollar index, which measures the exchange rate of the US dollar against major fiat currencies, initially strengthened after the Federal Reserve began its interest rate-cutting cycle in mid-2000, in September 2007, and August 2019. The S&P 500 is an indicator of investors' risk appetite in the whole world. , witnessed bouts of risk aversion during the early stages of the interest rate cutting cycle.

The shaded area shows recessions that followed the Fed's shift to interest rate cuts.

Historically, the Fed has only cut interest rates when a recession is on the doorstep. This has led forward-looking markets to treat interest rate cuts as a harbinger of bad news and seek safety in the US dollar.

Recessions have consistently followed the beginning of easing cycles over the past 60 years, according to data tracked by investment banking firm Piper Sandler.

“This sequence often occurs because the Fed tends to overshoot by raising interest rates and keeping them high for longer than necessary, inadvertently stifling economic growth. Interest rate cuts are usually only triggered when the economy is in decline.” Clear, unemployment is on the rise.“At this point, a recession is usually inevitable,” Piper Sandler said in a note to clients on January 2.

“This time, the same pattern is likely to be repeated, with the Fed maintaining a hawkish stance for longer than required,” Piper Sandler added.

According to some observers, the markets are currently… Overestimation The US economy's ability to avoid a recession following a sharp Fed rate hike cycle that saw borrowing costs rise by 525 basis points to 5.25% in the 16 months through July 2022. This leaves the door open for a negative market reaction to a potential recession.