XEX Market Observation Report: The time has come for the Fed to adjust its policy

Bitcoin rallied immediately after his speech at the Jackson Hole Fed conference.

After a long wait, it looks certain that the US central bank will cut interest rates in September after Jerome Powell said the “time has come” to ease monetary policy.

“I am increasingly confident that inflation will continue to rise back to 2%,” Powell said in a keynote speech at the Kansas City Fed’s Jackson Hole symposium. He added: “The labor market has cooled substantially from its prior overheating. We neither seek nor welcome a further cooling of labor market conditions.”

Powell added: Now is the time for a policy adjustment. The way forward is clear, and the timing and pace of rate cuts will depend on incoming data, the changing outlook, and the balance of risks.

Although the market fully expects Powell to hint at a rate cut at the September Fed meeting, the tone of his speech may be slightly more dovish than expected. In the minutes after Powells speech, Bitcoin (BTC) rose more than 1% to $61,900. As of now, Bitcoin (BTC) has surpassed $65,000

After years of keeping the Fed’s policy rate close to zero, the U.S. central bank began a long series of rate hikes in early 2022, culminating in a hike in the federal funds rate to a range of 5.25%-5.50% in 2023. Since then, the Fed has been waiting for clear signs of a meaningful slowdown in inflation toward its 2% target before starting to cut rates. That day has certainly arrived.

The question then becomes whether the Fed will cut the federal funds rate by 25 or 50 basis points at its mid-September meeting. The market continues to favor a 25 basis point cut, but the probability of a 50 basis point cut has risen from 24% a day ago to 32.5% now, according to CME FedWatch. There are a number of key economic reports between now and the September decision - including August employment and inflation data - that should be key to the Feds final decision.

Lower real interest rates tend to weigh on the value of the dollar and could support competing assets like gold and Bitcoin, said Zach Pandl, head of research at Grayscale Investments. Federal Reserve rate cuts, improving U.S. political sentiment toward cryptocurrencies, and net inflows into U.S. cryptocurrency ETFs should support Bitcoins price returning to all-time highs in the coming months.

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