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Decoding the Fed: How Fedspeak Influences Markets and Bitcoin's Rally

May 7th, 2024Rich ExcellRich Excell

Markets across the world are intensely focused on the Federal Reserve’s policies, often considering the Fed's actions and statements as critical indicators. The premise is straightforward: if the Fed adopts a dovish stance despite poor economic data, it's seen as a "bad news is good news" situation for risky assets. This implies that disappointing economic outcomes might benefit these assets, as they signal a potential for rate cuts by the Fed, boosting risk appetite. Conversely, if inflation rates are high but the Fed indicates a downward trend soon, markets typically react favorably. 

A recent Bloomberg article discussed using natural language processing (NLP) technology to develop a Fedspeak Model. This model assesses if the Fed commentary is hawkish (suggesting rake hikes) or dovish (indicating rate cuts). Traders found that mapping this model against other market indicators reveals a significant correlation. For example, Figure 1 compares the Fedspeak Model (blue) with the Citi Economic Surprise Index (white) and 2-year yields (orange), demonstrating a close alignment until 2024.  As early 2024 economic data proved strong, bond markets reacted with higher yields. However, the Fed’s dovish commentary kept markets stable. 

Figure 1: Citi Economic Surprise Index vs. US 2-year Treasury Yields & Bloomberg Fedspeak Model 

Source: Bloomberg 

Looking at Figure 2, that same Fedspeak model’s direction is inverted (blue) and compared to Bitcoin’s price movements over past 2 years (white) a clear pattern emerges. Hawkish Fed signals in 2022 correlated with a decline in Bitcoin’s value, whereas a predominantly dovish stance throughout 2023 has supported Bitcoin's rally. Institutional investors, viewing Bitcoin as a long-duration asset due to its scarce cash flows, are likely to see continued dovishness on rates as a positive signal for Bitcoin's value. Essentially, the Fedspeak Model could be hinting at an opportune moment to invest in Bitcoin. 

Figure 2: Bloomberg Fedspeak Model vs. Bitcoin/US Dollar cross-rate 

Source: Bloomberg 

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Financial Advice Disclaimer: Nothing in this article constitutes professional or financial advice, performance data or any recommendation that any specific cryptocurrency, portfolio, index, investment product, transaction or investment strategy is suitable for any specific person. You assume the sole responsibility of evaluating the merits and risks associated with all financial decisions and should seek the advice of a registered financial advisor when in doubt.

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