BlackRock Investment Institute says don’t count on the Federal Reserve slashing US interest rates as much as the bond market expects.
They argue that the US economy is still too strong and inflation is still too high for the central bank to make any deep cuts.
Market traders are betting on a total of 120 basis points worth of rate cuts this year alone, and they’re expecting even bigger cuts—up to 250 basis points—by the end of 2025.
That would bring the current interest rate range of 5.25%–5.5% down to around 2.8%–2.9% by the end of next year.
But BlackRock believes these expectations are overblown, and that markets are preparing for rate cuts like those seen in past recessions. But they don’t think it’ll go that far.
They see a combination of factors—including an aging workforce, budget deficits, and geopolitical tensions—keeping inflation and interest rates higher in the short-to-medium term.
The largest asset manager in the world added that they’re bearish on short-term US Treasuries.
Bond yields are reflecting these big rate cut expectations, but if the cuts aren’t as deep as people think, the bonds aren’t going to perform as well.
On the other hand, BlackRock is bullish on stocks, particularly those tied to artificial intelligence (AI). They see long-term growth potential in AI, which is why they’re overweight on US equities.
Expectations from the crypto market
Investors are skeptical about whether the cuts will even help the crypto market, especially Bitcoin. Right now, it is down about 3%, sitting at $58,158 after recently surging past $60,000.
As usual, Ether is not doing any better, dropping roughly 4% to $2,302. Lower interest rates typically boost crypto.
Lower borrowing costs and increased liquidity have made it easier for investors to take risks.
Shannon Saccocia, Chief Investment Officer at Neuberger Berman, says that if the Fed goes for a big cut, like 50 basis points, it could signal that the economy is in worse shape than people thought.
In that case, investors might bail on risky assets.
In 2019, when the Fed made successive rate cuts, Bitcoin rallied hard. But that was during a time when investor sentiment was much more bullish. Let’s be realistic, the current situation isn’t the same.
During earlier easing cycles, like in 2000-2003 and 2007-2009, markets often miscalculated the depth of the cuts, and they reacted badly to them.
In some of those periods, crypto prices struggled as a result.
Gautam Chhugani, an analyst at Bernstein, sees some opportunities for the crypto market if the Fed opts for smaller cuts.
Stablecoin lending yields could rise above 5%, potentially attracting institutional investors back into decentralized finance (DeFi) markets, particularly on the Ethereum network.
But even a smaller cut isn’t a sure thing.
Dave Birnbaum, Vice President of Product & Marketing at Coinbits, says that while lower rates usually help Bitcoin, the motivation behind it matters.
Arthur Hayes, one of Bitcoin’s oldest believers and the founder of BitMEX said:
“The Reverse Repo Program (RRP) pays 5.3%, and no T-bill under 1-year maturity pays more. Money market funds will move money from T-bills to the RRP, which is negative for liquidity. Since Jackson Hole, the RRP is up $120 billion. In my opinion, this will continue as long as T-bill rates remain lower than RRP.”
As if that wasn’t enough to worry about, political events are also harming the crypto market.
Today’s market tumble is actually largely credited to Former President Donald Trump’s second assassination attempt yesterday.
Remains to be seen how the election will affect the markets. Trump claims he likes crypto, and his opponent, the Democratic Vice President Kamala Harris couldn’t care less about it.
Analysts at Bernstein and Bitfinex believe that if Kamala wins, BTC will crash below $40,000. But if Trump wins, they’re predicting another all-time high before the year is over.
Right now, Kamala is leading in the polls, largely thanks to the most recent presidential debate that voters believe Trump completely flopped on.
