A rate cut could increase inflation and strengthen the Japanese yen, causing markets to collapse
The era of central banks is over, Hayes said ahead of the Fed’s expected rate cut on Wednesday.
Ethena’s USDe and Pendle’s BTC staking could benefit from the impending low-interest rate regime, Hayes said.
Demand for tokenized Treasuries, an interest-rate-sensitive product, could weaken if interest rates remain low.
Arthur Hayes, chief investment officer of Maelstrom and co-founder of BitMEX, made a bold claim that risk assets, including cryptocurrencies, could crash within days of the Fed’s first rate cut, which is expected to be announced on Wednesday.
The Fed is expected to announce its first rate cut since 2020 later today, kicking off the so-called liquidity easing cycle that has historically boded well for Bitcoin (BTC).
However, the impending rate cut would exacerbate the inflation problem and lead to a strengthening of the yen (JPY), sparking widespread risk aversion, Hayes explained in an exclusive interview with CoinDesk on the sidelines of the Token2049 conference in Singapore.
“Cutting rates is a bad idea because inflation is still a problem in the U.S., with the government being the main contributor to persistent price pressures. If you make borrowing cheaper, that contributes to inflation,” Hayes said.
“The second reason is that the interest rate differential between the U.S. and Japan is narrowing with rate cuts. That could lead to a sharp appreciation of the yen and trigger the unwinding of yen carry trades,” Hayes added.
Markets saw the destabilizing effect of yen strength and the unwinding of yen carry trades in early August, after the Bank of Japan raised its benchmark interest rate from 0% to 0.25%. Bitcoin fell from about $64,000 to $50,000 in a week, according to CoinDesk data.
USD/JPY is the only thing that matters in the short term, Hayes said.
Most analysts expect the BoJ to hike rates further in the coming months, with the Fed taking the other path. Diverging paths in monetary policy mean the yen could rally further, forcing investors to liquidate long positions in risk assets funded by JPY-denominated loans.
Hayes predicts that US interest rates could fall back to near-zero levels, from the current range of 5.25% to 5.5%.
“The initial reaction will be negative and the central bank’s response will be to cut more to stem the crisis. So I think cutting rates is a bad idea, but they’re going to do it anyway, and so they’re going to get to zero pretty quickly,” Hayes explained.
Ether on the rise
NEAR zero interest rates mean investors could once again seek yield elsewhere, reigniting the bullish trend in yield-rich pockets of the crypto market like ether, Ethena’s USDe and Pendle’s BTC staking.
Ether (ETH), which offers a 4% annualized staking yield, would ultimately benefit from ultra-low rates.
Ethena’s USDe, which uses BTC and ETH as backing assets, combining them with equal-value short perpetual futures positions to generate yield, and DeFi platform Pendle’s BTC staking, which as of last week offered a 45% floating yield, should also benefit, Hayes explained.
At the same time, demand for tokenized Treasuries, an interest-rate-sensitive product, could weaken.
The Age of Central Banks Is Over
“I agree with that prediction 100%. The age of central banks is over. Politicians will take over and ask banks to create liquidity in specific sectors of the economy,” Hayes joked.
“So you’re going to see loose and tight capital controls in different places, which means that crypto is the only asset you can own that is globally portable and allows you to get out of that system,” Hayes added.
