The Federal Reserve said after Wednesday’s interest rate decision that its economists no longer factor in a recession for 2023. At first glance, this is good for the bitcoin price, because a recession usually causes price drops in risk assets, because people have to sell their investments to pay the bills.
No more recession?
US gross domestic product (GDP) came in surprisingly well yesterday, up 2.4 percent (if you extend the data year-over-year). The economy was expected to grow by 1.8 percent in the second quarter of 2023, so in that respect it is a (very) positive surprise.
Furthermore, durable goods orders rose well above expectations, commodity prices are recovering as the US economy proves resilient, China is stimulating its economy and most Western economies are at full employment, which basically means that unemployment is extremely low.
Based on that data, it is difficult to speak of a recession and that is the conclusion that we are currently seeing everywhere in the media (and in the prices of risk assets). But will we then not have a recession at all? Hasn’t the Federal Reserve raised interest rates aggressively over the past 16 months and won’t the economy suffer at all?
The Federal Reserve on the Economy
As far as I’m concerned, we can glean a lot of interesting information from the latest statements by Fed Chairman Jerome Powell at his press conference following the interest rate decision. “The Federal Reserve staff now foresees an apparent slowdown in growth towards the end of 2023, but given the resilience of the economy, they are no longer predicting a recession,” Powell said.
The key piece in this statement is “given the resilience of the economy.” In this, Powell actually says that his economists base themselves on the past, after all, we have seen that resilience in recent months. Today’s data reflects the performance of the US economy over the past few months.
Can we then blindly assume that the economy will continue the resilience of recent months towards the end of 2023? It now seems like everyone has moved from the narrative of “we will have a recession anyway” to “we will definitely not have another recession.”
BlackRock sees it differently
The big BlackRock doesn’t quite seem to agree yet with the “we’re not going to have another recession” narrative that is popping up all over the place right now. They foresee a scenario in which we move towards a so-called “full employment recession”. That would mean a recession in which unemployment remains extremely low.
“The economic relationships that investors could rely on have been broken in the new regime. Fewer workers are available in major economies due to demographic trends, meaning that low unemployment is no longer a good predictor of an economy’s health,” said BlackRock.
“Labour shortages (tightness on the labor market) can force companies to keep employees on board, even if turnover falls, because they are afraid that they will not be able to get these people back. This creates the unusual possibility of a ‘full employment recession’ in America and Europe.”
In theory, this could have a greater impact on corporate earnings than in the past and put downward pressure on the prices of stocks and other risk assets.
What does this mean for bitcoin?
All in all, it seems that the market is jumping too fast again at the moment. For months the recession was a certainty and now suddenly there will be no more recession. However, remember that it generally takes ~12 months for the full impact of a central bank rate hike to be seen in the economy.
We are now about 16 months into the Federal Reserve’s interest rate campaign and only ONCE in history has a recession started less than 19 months after the central bank started its interest rate campaign.
This is not to suggest that we are by definition heading for a gigantic recession, but rather that predicting the future is difficult. Forecasts are generally not good and history suggests that it is still too early to draw any conclusions.
The delayed impact of the Federal Reserve’s interest rate hikes has yet to be felt, so several scenarios are still on the table. For now, everything looks great and the market is fully praising the recession that has been predicted in recent months.
Now stocks are shooting up like there will never be a recession again and I don’t want to believe that madness at the moment. In fact, this sentiment makes me feel it is advisable to perhaps take an even more defensive stance.
Avoiding a recession would be great for the bitcoin price in the short term, but don’t get caught up in the euphoric sentiment. Keep looking at the data and the big picture and don’t be tempted by the developments we see from day to day.