Crypto Comeback: Bitcoin, Gold & Stocks Surge on Dovish Fed Pivot

The Federal Reserve’s aggressive interest rate hikes through 2022 and early 2023 now appear to be coming to an end, with the central bank signaling a more dovish monetary policy outlook in 2024.

At its December meeting, the Fed left its benchmark rate unchanged in a targeted range of 5.25-5.50%, but trimmed its projection for where rates will end 2024 to 4.6% from the previous 5.1% forecast.

Keypoints

• The Federal Reserve held interest rates steady in December after aggressively raising them over the past year, but signaled a more dovish policy outlook for 2024 with rate cuts now expected
• Inflation has steadily declined in recent months to 3.1% in November, reducing pressure on the Fed to continue hiking rates
• Stock markets have rallied lately based on expectations of a “soft landing” for the economy and peak inflation/interest rates, though some skepticism remains
• Cryptocurrencies fell sharply with other risky assets as rates rose in 2022, but have rebounded on hopes of future Fed rate cuts and possible Bitcoin ETF approval
• Long-term investors are encouraged to maintain diversified portfolios despite volatility, and potentially take advantage of pullbacks to add at lower prices

This shift follows mounting evidence that inflationary pressures are abating in the economy. The latest Consumer Price Index (CPI) report showed inflation slowing to 7.1% annually in November, down from a peak of 9.1% in June. With inflation seemingly past its high point, the Fed can ease off the brake pedal on interest rates without stoking further price increases.

Financial markets welcomed the Fed’s more moderate tone, extending a powerful rally over the past couple months. Investors are increasingly betting that the economy can achieve a “soft landing” where growth slows substantially but avoids sliding into recession. Risky assets like stocks and cryptocurrencies that sold off through 2022 on recession fears have bounded higher recently.

In particular, cryptocurrency prices cratered last year alongside tech stocks, falling victim to the Fed’s broad liquidity drain. But news in recent weeks of possible Bitcoin exchange-traded fund (ETF) approvals by the SEC, combined with stabilizing interest rate expectations, has fueled a strong crypto rebound. Bitcoin has surged back above $17,000 from under $16,000 prior to the latest Fed announcement.

Some skeptical analysts warn financial markets may be getting ahead of themselves pricing in the soft landing scenario. Tighter monetary conditions could yet tip key sectors like housing into deeper declines and spill over into significant job losses. However, resilient consumer spending and healthy business balance sheets provide buffer against a downturn.

For long-term investors, tuning out short-term market fluctuations is often the wisest strategy. Even with additional Fed rate hikes possible in 2023 if inflation proves sticky, peak interest rates now look close at hand. Market pullbacks related to monetary tightening present opportunities for investors to add exposure at better valuations. Maintaining portfolio diversification and dollar-cost averaging into quality assets can overcome volatility over time.