- The soaring price of bitcoin could delay the Federal Reserve’s plans to cut interest rates, according to JPMorgan.
- The bank said signs of froth in risk assets like bitcoin could lead to higher for longer interest rates.
- “Premature rate-cutting risks further inflating asset prices or causing another leg up in inflation,” JPMorgan said.
The record rally in bitcoin could lead the Federal Reserve to delay its planned interest rate cuts later this year, according to JPMorgan.
Strategist Marko Kolanovic said in a recent note that bitcoin’s rally above $60,000, combined with record highs for stocks, suggests that “froth” is beginning to accumulate in risk assets.
That froth could ultimately drive the Fed to hold off on its planned interest rate cuts, which are often stimulative for risk assets, as it could unleash another round of inflation.
“This may keep monetary policy higher for longer, as premature rate cutting risks further inflating asset prices or causing another leg up in inflation,” Kolanovic said.
The market currently expects the Fed to cut interest rates at least three times in 2024, with the first rate cut occurring in June, according to the CME FedWatch Tool.
With much of the stock market’s rally since October being driven by the expectation of tamed inflation and lower interest rates, a further delay in the Fed’s planned interest rate cuts could throw a wrench into the stock market’s bullish narrative.
But according to Kolanovic, “if the disinflation is still immaculate, ‘what’s the rush?'” paraphrasing recent comments from Fed governor Christopher Waller.
All-in, Kolanovic continues to lean bearish on stocks, arguing that the market is currently priced for perfection with little indication that investors are hedging out risks.
“Stock vol has been in the neighborhood of multi-year lows, making us nervous given stocks are expensive (relative to bonds and cash), well-owned, concentrated into megacaps, overly reliant on the AI story, and seemingly assuming zero chance of growth risk (by virtue of being at highs),” Kolanovic said.
Kolanovic has a 4,200 price target for the S&P 500, representing potential downside of 18% from current levels.
