On July 18, the European Central Bank (ECB) decided to adopt a rate pause. Hence, this raises concerns of the U.S. Federal Reserve mirroring the approach. The speculation has grown as the International Monetary Fund (IMF) urged Fed to shift rate cuts to “late 2024.”

ECB’s Rate Cut Decision

The ECB’s July policy meeting concluded with the announcement to maintain key interest rates at their current levels. This includes 4.25% for main refinancing operations, 4.5% for the marginal lending facility, and 3.75% for the deposit facility. The ECB rate pause decision, expected by many analysts, aims to curb inflation

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However, ECB has projected inflation to remain above the 2% target well into next year. Hence, the ECB emphasized a “data-dependent and meeting-by-meeting approach” in determining the duration and level of monetary restriction.

Moreover, they assured that policy rates would remain “sufficiently restrictive for as long as necessary” to achieve their inflation goals. The ECB also highlighted the measured reduction of the Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios.

U.S. Federal Reserve’s Position

The International Monetary Fund (IMF) recently recommended that the U.S. Federal Reserve should not cut interest rates until “late 2024.” This advice aligns with the Fed’s cautious stance, influenced by robust economic growth and ongoing inflation concerns. Moreover, it has slashed expectations of Fed rate cuts as early as next month.

The Fed’s current rate stands at a historic high of 5.50%, and a premature cut could risk further inflation spikes. IMF Chief Economist Pierre-Olivier Gourinchas emphasized the need for caution, according to a Reuters report. He stated, “Given salient upside risks to inflation — brought into stark relief by data outturns earlier this year — it would be prudent to lower the policy rate only after there is clearer evidence in the data that inflation is sustainably returning to the FOMC’s 2 percent goal.”

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Implications for Bitcoin & The Broader Crypto Market

The Fed’s potential decision to follow the ECB’s lead in holding interest rates steady could have significant implications for the crypto market, particularly Bitcoin (BTC). Historically, Bitcoin has shown sensitivity to interest rate changes. Moreover, rate hikes have often led to decreased investment in riskier assets like cryptocurrencies. Hence, a prolonged period of high interest rates could therefore dampen investor enthusiasm for Bitcoin.

Higher interest rates make traditional investments like bonds more attractive, potentially diverting funds away from cryptocurrencies. This shift could lead to reduced liquidity and lower prices for Bitcoin and other digital assets.

Inflation Hedge Bitcoin is often touted as a hedge against inflation. However, if the Fed’s rate pause successfully curbs inflation, the perceived need for such a hedge may diminish. This could negatively impact Bitcoin’s appeal.

Uncertainty about future rate cuts can lead to market volatility. The IMF’s stance that rate cuts should be postponed until late 2024 could result in cautious investor behavior. This could impact Bitcoin’s short-term price movements. In addition, a hawkish stance from the Fed after crucial economic data like CPI has also affected the BTC price negatively.

Analyst Expectations

Deutsche Bank macro analysts predict the Fed will maintain its current policy settings, mirroring the ECB’s cautious approach. They forecast two more 25 basis point cuts in 2024, possibly in September and December. However, they stressed that these cuts are not guaranteed and will depend on future economic data.

Meanwhile, TD Securities analysts expect the market to closely watch the Fed’s language for any hints of a softer stance towards future rate cuts. They anticipate Fed Chair Jerome Powell to remain “vague and noncommittal” in his communications. This reflects a cautious approach amidst uncertain economic conditions.

Also Read: Fed Williams Says First Rate Cut More Likely In Coming Month