The soaring price of bitcoin could delay the Federal Reserve's plans to cut interest rates, according to JPMorgan.
JPMorgan suggests that the recent surge in bitcoin prices might cause the Federal Reserve to postpone its planned interest rate cuts later this year.
In a recent note, strategist Marko Kolanovic pointed out that bitcoin's climb above $60,000, along with record highs in the stock market, indicates a buildup of "froth" in risky assets. This froth could lead the Fed to delay rate cuts, which are typically seen as supportive for risky assets, out of concern that it could fuel further 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 noted.
The market is currently pricing in at least three rate cuts by the Fed in 2024, with the first expected in June, according to the CME FedWatch Tool. However, if the Fed perceives that inflation remains under control, it might decide to delay these cuts.
Kolanovic remains cautious on stocks, arguing that the market is priced for perfection and lacks hedging against potential risks. He highlighted that stock volatility is near multi-year lows, indicating a high level of complacency among investors.
"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 explained.
He has set a price target of 4,200 for the S&P 500, which implies a potential 18% downside from current levels.
