The Federal Reserve (FED) or the US central bank, announces tonight at 8 p.m. Dutch time by how many percentage points they are likely to lower interest rates. The last time the interest rate was lowered was in 2008, at the start of the financial crisis. Bitcoin saw the light of day less than a year later.
The impact of the current interest rate cut may turn out to be very positive for the price of bitcoin.
Question marks with American interest rate cut
So tonight it will be announced how many percentage points the interest will be lowered. The expectation is somewhere between 0.25 and 0.50 percentage point. In the first instance, a FED interest rate cut means that it costs less to borrow. For example, consider a lower interest rate if you take out a mortgage or if you want a loan for starting a business.
But why lower interest rates now? There is no general consensus as to why this interest rate cut will take place, that is hopefully clear tonight. The most likely conclusion is that the reduction is intended to strengthen the competitive position of the US in the world.
A lower interest rate means that the dollar is cheaper, which in theory means more US exports and fewer imports.
Nick Timiraos of the Wall Street Journal explains: “The Fed sees that the relationship between the US economy and the rest of the world is closer than in the past. They think that domestic interest rates cannot rise much higher than those in other developed economies, which have much lower or even negative rates. ”
That is also the lecture by Bill Diviney, an American analyst at ABN Amro. He tells de Volkskrant that the interest rate cut is rather a preventive action, because there seem to be some dark clouds on the horizon: the trade war with China and a worldwide dip in production.
Bert Colijn, macro-economist at ING says in de Volkskrant: “The FED plans to give the US economy a soft landing, because it is really going to slow down this year. Last year Trump cranked up the economy with tax cuts. “
The FED has raised interest rates nine times since December 2015. With this, the Central Bank tried to normalize interest rates after the recession. Trump, who has no direct influence on the policy of the independent FED, strongly criticizes this policy. “The FED has raised way too early and far too much,” he wrote on Twitter.
Europe is also playing the game
But there is more to it than just the interest rate reduction from America. The European Central Bank has indicated that they will also take measures in September (whether or not in response to America). ECB president Mario Draghi said about this: “The outlook is getting worse and worse. Things are getting worse, especially in the manufacturing industry, especially for countries where production is very important. “
The ECB has not yet confirmed how they want to tackle this, but central banks usually use two instruments: reducing interest rates or printing more money (they do this by buying government bonds, for example, this is called quantitative easing).
The perfect storm for bitcoin
And as several analysts acknowledge, that can turn out well for bitcoin.
Analyst Anthony Pompliano says that the interest rate cuts and the quantitative easing ensure a higher price for all assets. He also thinks that these instruments will be less effective than before. Central banks have already lowered interest rates by more than 5.0 percent in the last two recessions. And we cannot do that again since the current interest rates are far below those 5 percent.
Speaking of bitcoin, the actions of the central banks is not the only thing that can be good for the value of bitcoin. The timing is just as important. You normally only notice the effect of a monetary stimulus six to twelve months later. As the European Central Bank’s interest rate cuts are likely to start in September, the effect will not be visible until February 2020 or later.
And let that be halving around the bitcoin block.
New and cheap dollars and euros artificially increase the value of traditional assets, at the same time that bitcoin’s stock-to-flow ratio becomes more attractive.
Bitcoin can prove value
By the way, do not expect a parabolic growth of bitcoin immediately. It will take time for the effect of this coincidence to translate into the price of bitcoin.
A decentralized digital currency that cannot be devalued by people only becomes more valuable. Certainly if residents of countries whose central banks devalue their own currency are looking for a safe haven for their assets.
Pompliano: “Normally I would be worried about decisions like this from central banks, but luckily we have an alternative that offers insurance against this chaos. It’s time to show how great bitcoin can be. “
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