Federal Reserve's Interest Rate Reduction Path Remains Unchanged, Supporting a Positive Crypto Market Outlook

The recent inflation report had little impact on the Federal Reserve's plans to ease monetary policy. Over the past few weeks, the yield on 10-year US Treasury bonds has risen sharply from 3.6% to 4.1%, driven by a shift by quant-driven fund managers from fixed-income investments to equities, resulting in falling bond prices and rising yields. However, this has not deterred stock market pessimists from attempting to capitalize on the situation, claiming that the stock market rally cannot be sustained. They are not considering the broader picture. Recently, the narrative has focused on why the central bank cannot cut interest rates, with concerns that Japan's new government would tighten policy, making US bonds less attractive, and that strong payroll gains would fuel inflation. These concerns have been quickly dismissed, with Japan's prime minister stating that the economy cannot handle rate hikes and domestic policymakers downplaying the significance of September employment gains. This week, pessimists claimed that higher-than-anticipated consumer price index growth for September meant rate cuts were off the table. However, they are not looking at the long-term inflation trend, which is steadily moving downwards, indicating that the central bank will have ample room to lower interest rates throughout next year, supporting a steady rally in risk assets like crypto. The US Bureau of Labor Statistics reported September CPI growth of 2.4%, compared to the expected 2.3%, which, although slightly disappointing, still marks a move in the right direction when viewed relative to August's 2.5% increase. The data shows that the long-term inflation trend is headed in one steady direction down, which means the central bank will have plenty of room to lower interest rates well into next year. The trend over the last few years indicates that inflation growth typically slows throughout the year, and as we move further away from the effects of COVID stimulus, the slowdown has accelerated. The implication is that inflation growth should slow more over the next three months. With economic trends returning to normal, the Fed can also return interest rates to more normal levels. The pace of monthly growth has slowed significantly, from 0.6% in 2021-2022 to 0.3% in 2023, and 0.2% year-to-date, approaching pre-pandemic levels of around 0.15% per month. Based on the numbers, it appears that the trend for inflation is returning to pre-pandemic levels of normal, which would give the Fed plenty of room to lower interest rates. The difference between the effective fed funds rate and annualized CPI growth is currently at 250 basis points, one of the highest levels since 2000, indicating that the Fed can lower rates by that amount before policy no longer weighs on inflation. Wall Street expects borrowing costs to drop from 4.9% today to 3.4% by October next year, and based on the numbers, the Fed has plenty of room to do that right now, with a cushion of another 100 basis points. The change should support stable economic growth and a steady rally in risk assets like bitcoin and ether.