Benzinga - by Piero Cingari, Benzinga Staff Writer.
The increasingly bullish sentiment on Bitcoin (CRYPTO: BTC) and other risky assets demonstrated by investors lately might force the Federal Reserve to maintain a more hawkish stance than expected to prevent further inflaming a financial asset bubble, which could result in a subsequent higher inflation.
This perspective is gaining traction among Wall Street analysts, with Alfonso Peccatiello, founder of ‘The Macro Compass’ and known on X as @macroalf, positioning himself among those anticipating a shorter and shallower Fed rate cut cycle ahead.
Last week, JP Morgan Chief Market Strategist Marko Kolanovic reportedly voiced apprehensions that the surge in Bitcoin and similar digital assets might restrict the Federal Reserve’s capacity to ease monetary policies.
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“Investors aren't thinking macro at all recently,” Peccatiello noted in a Sunday post, highlighting the trend of pushing non-cash flow-producing assets such as Bitcoin and gold to unprecedented highs despite risk-free rates hovering at 5.25%.
He drew parallels to 1999 and 2007 when “animal spirits were running loose,” indicating a similar frenzy in the current market.
In this week's episode of The Macro Trading Floor, Brent and I discuss:– How to approach this animal-spirit driven market
– Why the Bank of Japan's decisions will matter for global bond and FX markets
– Gold and Bitcoin price action
Free on all your favorite podcast apps. pic.twitter.com/mJP4dWf7KU
— Alf (@MacroAlf) March 9, 2024
This Time Is Different Gains Traction Peccatiello highlighted that some Federal Reserve officials have begun expressing beliefs that “this time is different,” contemplating the potential for “higher neutral rates.”
Discussions around the potential for higher neutral rates indicate a conviction in a structurally changed U.S. economy, one that could sustain significantly higher interest rates without undermining its capacity to achieve 1.5-2.0% real GDP growth.
According to Peccatiello, this pivot towards higher neutral rates could lead to a shallow and brief cutting cycle, reminiscent of 1995 when the Fed reduced interest rates only three times before taking a multi-year hiatus.
Peccatiello also noted the role of a “more friendly bond market pricing” in nourishing today’s market “animal spirits.”
“Markets are pricing 3-4 cuts this year, 4 more next year, and some more after that in 2026 and 2027,” he wrote.
However, if the Fed opts for a 1995-style approach, thus defying market expectations, it could lead to disappointment among investors.
Peccatiello advises vigilance, especially as “several macro volatility events loom large.”
This week, all eyes will be on February’s inflation report, a crucial data point ahead of the upcoming March Fed meeting.
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