Cryptocurrencies Poised for Rally as Treasury Injects Liquidity

Bitcoin and other cryptocurrencies are poised for a potential rally, regardless of the Federal Reserve's Open Market Committee (FOMC) decision on interest rates this week. The FOMC's meeting on May 7 is anticipated to be a pivotal moment for risk-on assets, including cryptocurrencies. While the consensus suggests no change in interest rates, the injection of liquidity by the US Treasury to prevent an economic recession could drive gains for Bitcoin and altcoins.

An accommodative monetary policy could stimulate economic activity, but the Federal Reserve is also grappling with a weakening US dollar. Some analysts argue that a US interest rate cut may not stimulate growth due to persistent recession risks, potentially creating an ideal environment for alternative hedge assets such as cryptocurrencies.

Economist and investor Jim Paulsen notes that when Fed funds trade above a “neutral” interest rate, the economy has historically moved toward recession or a “growth recession.” This pattern has been observed since 1971, and Paulsen suggests that the Fed will likely be compelled to lower interest rates. Additionally, Federal Reserve Chair Jerome Powell is under significant pressure from the US President, who has criticized the Fed for not reducing the cost of capital quickly enough.

Concerns about overheated markets persist as US consumer inflation exceeds the 2% target, and April unemployment rates of 4.2% indicate no signs of economic weakness. Market expectations, as reflected in Treasury yield futures, show a 76% chance of interest rates at 4.0% or lower by Sept. 17. This probability has dropped from 90% on April 29, indicating that traders are growing less confident that the Fed will ease monetary policy. However, this could prompt the Treasury to inject liquidity into markets to support government spending.

Regardless of the FOMC’s decision, the Fed’s recent $20.5 billion Treasury bond purchase on May 5 signals renewed intervention. Additional liquidity has historically been bullish for cryptocurrencies, especially as the US dollar lags behind other major global currencies. Consequently, investors are increasingly seeking alternative hedges rather than holding cash.

The US Dollar Index (DXY) has dropped below 100 for the first time since July 2023, as investors retreat from US markets amid economic uncertainty. Meanwhile, gold has risen over 12% in the past 30 days and is now trading just 2% below its all-time high of $3,500. Declining confidence in the US Treasury’s ability to finance its debt favors scarce assets such as Bitcoin.

While the probability of multiple rate cuts has diminished, this scenario may still be favorable for cryptocurrencies. Should the Fed be pressured to expand its balance sheet, it would likely fuel inflation and erode the value of fixed-income investment factors that ultimately support cryptocurrencies.