On September 18, 2024, the US Federal Reserve made its first interest rate cut in this cycle. At that time, Bitcoin responded positively, climbing steadily to an all-time high of $108,000 in December. But the situation has changed, and Bitcoin now faces a different environment.
The Market and Federal Reserve Are Out of Sync
Right now, the market is taking a different approach than the Federal Reserve expected. Back in September, the Fed lowered rates to support the economy. However, market rates, which reflect the interest investors demand, have actually gone up since then.
Why has this happened? The Federal Reserve doesn’t control all interest rates. If lenders want a 5% return for a 10-year loan, the rate adjusts to meet that demand. Markets set rates based on what investors think is fair, even if it doesn’t align with the Fed’s decisions.
The Gap Between Market and Fed Projections
Analyst Andy Constan recently shared a chart showing how much market expectations differ from the Federal Reserve’s projections. The market predicts higher rates (shown in red) compared to the Fed’s forecasts (shown in yellow).
— Andy Constan (@dampedspring) January 10, 2025
In December, the Fed estimated long-term interest rates would settle around 3%. The market, however, is betting on rates closer to 4.25%. Essentially, investors believe that rates will stay higher for longer than the Fed has suggested.
What Does This Mean for Bitcoin?
These higher rates have created some challenges for Bitcoin. Over the last few months, many investors assumed the Fed’s rate cuts would lead to lower borrowing costs, which often benefits Bitcoin. Instead, the rise in market rates has put some pressure on its price.
Bitcoin even dipped below $90,000 in the past 24 hours, though it has since recovered slightly. At the time of writing, Bitcoin is trading at $95,120, according to CoinMarketCap. That’s up 1% over the last day, but still down 6.6% from a week ago.
Rising rates can make traditional investments like bonds more attractive compared to Bitcoin, which might explain some of the price pressure. However, it’s worth noting that higher rates often reflect confidence in the economy. A strong economy can lead to higher returns for investors, which is why long-term rates are trending upward.
For example, if economic growth is expected to be 3% and inflation is around 2%, it makes sense for investors to demand a 5% return. Without adequate returns, they’re unlikely to lend out their money.
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