A more aggressive Fed rate cut could signal a more assertive monetary policy stance, potentially leading to a pronounced market response.
The Federal Reserve hinted at a rate cut in September, yet Bitcoin prices have not reacted as expected. Instead of rising, they’ve dipped slightly. Arthur Hayes, who co-founded and once led BitMEX, suggests an unexpected factor could be at play: reverse repurchase agreements (repos).
High-Yield Repos Stall Bitcoin Growth
Hayes, now Chief Investment Officer at Maelstrom, points to the high interest rates offered by reverse repos (currently at 5.3%) compared to Treasury bills (4.38%). This appealing yield attracts large money market funds, draws cash away from Treasury bills, and limits the amount of money available for riskier assets like Bitcoin.
My theory on why Fed rate cuts aren't going to plan.
— Arthur Hayes (@CryptoHayes) September 2, 2024
Since JAYPOW annc Sept rate cut at J-Hole, $BTC down 10%, y? I thot rate cuts were good for risk assets.
RRP pays 5.3% no T-bill under 1-yr maturity pays more. MMF will move money from T-bill -> RRP which is $ liq -ve.
Since…
Think of it like this: reverse repos are essentially a secure “parking lot” for big banks and money managers to temporarily store their cash. And right now, this parking lot offers a better interest rate than other safe investments. As Hayes explains, this keeps capital stagnant, preventing it from flowing through the economy and potentially fueling growth in riskier assets like Bitcoin.
Traditionally, lower interest rates are seen as positive for Bitcoin. The logic goes: lower rates make borrowing and spending more attractive, which increases liquidity in the market. Additionally, lower interest rates often weaken the dollar, making Bitcoin appear more attractive in comparison.
However, the current situation with high-yielding reverse repos throws a wrench in this theory. Hayes argues that the easy access to high-interest parking for cash is dampening the usual effects of rate cuts, hence the less-than-expected response from Bitcoin prices.
Fed Meeting Stirs Bitcoin Speculation
The Federal Reserve’s September 18 meeting is drawing significant attention. The CME Fed Watch tool shows a 69% probability of a 25 basis point cut and a 31% likelihood of a 50 basis point cut. This decision will likely have a notable impact on the market.
If the Fed opts for a larger rate cut, it may indicate a more assertive approach, which could trigger a stronger market reaction. However, the role of reverse repos raises questions about whether this will lead to a significant rise in Bitcoin prices.
Hayes’ theory offers an intriguing perspective on the market’s current subdued behavior. Yet, the cryptocurrency market is complex and driven by various elements. As the Fed meeting approaches and the situation with reverse repos evolves, the influence on Bitcoin prices may become clearer.
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