How the Federal Reserve can lower interest rates without lowering interest rates

The Federal Reserve is perhaps the most important topic for Bitcoiners right now. When will that damned US central bank finally cut interest rates? Aaron Back of the Wall Street Journal thinks it is possible to manufacture lower interest rates without actually lowering interest rates.

Smart tricks for the Federal Reserve

Can the Federal Reserve pull off a clever trick in the coming months that will effectively lower interest rates? And what does that theoretically mean for the Bitcoin price?

In principle it is quite simple. With its interest rate policy, the Federal Reserve provides guidelines for the Fed Funds Rate – the interest rate that banks use to… overnight to lend to each other.

However, by making statements about the future interest rate path, they can also influence other market interest rates and thus in fact steer the market. For example, they can recognize that inflation is on its way to the desired 2.0% and thus create the expectation that interest rates will fall.

This in turn causes interest rates to fall at other points in the market.

For example, this week we saw market yields on 10-year US government bonds fall as a result of positive inflation data.

Why is this important?

This is important, because mortgage interest rates, for example, also depend on the development of market interest rates on government bonds. In fact, the Federal Reserve can also “lower rates” in this way by making positive statements about the interest rate path they expect to follow.

Now expectations are quite pessimistic. After last Wednesday’s interest rate meeting, the Fed is expected to implement only one more interest rate cut in 2024.

In this way they can “steer” the market by making statements that point in a different direction. If they choose to do so, Bitcoin can benefit considerably from this in the coming months.

At the moment, the Bitcoin price is considerably suppressed by the negative expectations that prevail.

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