Bitcoin has rebounded above $95,000, and the upward trend may continue even after this week's FOMC meeting.
Key Takeaways
- The Federal Reserve might pause rate hikes but inject liquidity, potentially fueling cryptocurrencies as a hedge against recession.
- A weakening USD and gold's rally signal a market shift toward scarce assets.
The Federal Open Market Committee (FOMC) interest rate decision on May 7 will be a critical moment for risk assets, including cryptocurrencies. While no change in rates is widely expected, Bitcoin and altcoins could surge if the U.S. Treasury is forced to inject liquidity to avert an economic downturn.
How Monetary Policy Impacts Crypto
Looser monetary policies could stimulate economic activity, but the Fed is also grappling with a weak dollar. Some analysts argue that U.S. rate cuts may fail to spur growth due to lingering recession risks—creating an ideal environment for alternative hedges like crypto.
Source: Jim Paulsen
Economist and investor Jim Paulsen notes that when the federal funds rate exceeds the "neutral" rate (Fed funds rate minus annual core PCE inflation), recessions or "growth recessions" (slow growth with rising unemployment and weak demand) historically follow. Data since 1971 supports this pattern.
Paulsen suggests the Fed may be forced to cut rates. Additionally, Fed Chair Jerome Powell faces pressure from President Trump, who criticized the central bank for not lowering capital costs quickly enough.
Why the Fed Could Ease Policy
With U.S. consumer inflation above the 2% target and April unemployment at 4.2%, concerns about an overheating economy persist.
FOMC Rate Decision Probabilities (September 17)
Source: CME FedWatch
| Scenario | Probability |
|------------------------|------------|
| Rate cut to ≤4.0% | 76% |
| No change/hike | 24% |
Traders' confidence in Fed easing has declined since late April (from 90% to 76%). While this seems bearish initially, it might push the Treasury to add liquidity and support government spending.
Liquidity Injections & Crypto Bullishness
The Fed's $20.5B Treasury purchase on May 5 signals renewed market intervention. Historically, added liquidity boosts crypto—especially when the USD lags behind global currencies. Investors are increasingly seeking alternative hedges over cash.
DXY USD Index (Green) vs. BTC/USD (Orange)
Source: TradingView / Cointelegraph
- The DXY fell below 100 for the first time since July 2023.
- Gold rose 12% in 30 days, trading 2% below its ATH ($3,500).
Declining confidence in U.S. fiscal stability benefits scarce assets like Bitcoin. Even if rate-cut odds diminish, a Fed balance sheet expansion could drive inflation and erode fixed-income investments, indirectly supporting crypto.
👉 Why Bitcoin Outperforms Traditional Hedges
FAQ
1. How does Fed policy affect Bitcoin?
Fed liquidity injections and rate cuts tend to weaken the USD, making scarce assets like Bitcoin more attractive as hedges.
2. Why is gold rallying alongside Bitcoin?
Both are seen as inflation-resistant stores of value during economic uncertainty.
3. Could Bitcoin drop if the Fed hikes rates?
Short-term volatility is possible, but long-term adoption trends and scarcity likely outweigh Fed actions.
4. What’s the "neutral rate" and why does it matter?
It’s the theoretical Fed rate that neither spurs nor slows growth. Exceeding it often precedes recessions, prompting risk-off shifts to crypto.
👉 Bitcoin as a Hedge: Expert Insights