The Fed Minutes of the Most Recent Meeting Show More Rate Hikes – What Does That Mean for Crypto?
The US Federal Reserve is increasing interest rates. That was at least the conclusion of the minutes released by the US Federal Reserve.st This Wednesday, February 13th was the Federal Open Market Committee’s (FOMC), meeting. This could prove to be a significant medium-term headwind in crypto.
At their meeting earlier in the month, the FOMC, which is made up of a variety of Federal Reserve Governors as well as regional Fed Presidents raised interest rates by 25 bps to a range of 4.50-4.75%. This was the slowdown after a 50-bps rate increase at their last meeting in 2022. It was followed by four consecutive 75-bps rate increases.
According to meeting minutes, FOMC members believe that further interest rate increases will be required to maintain inflation at 2.0%. “Almost all” FOMC members supported the reduction to 25 bps rate increases. The minutes noted that the “upside risks to inflation outlook” were a key factor in shaping the policy outlook. However, a few officials warned against an “insufficiently restrictive” approach as it could hinder progress towards bringing down inflation.
Markets are urged to increase Fed tightening bets by hot US data
After financial markets increased their Fed tightening bets over the past few weeks, the Fed released the latest minutes of its meeting. In fact, analysts had only two additional 25 bps rate hikes forecasted in January. One at the February meeting was delivered and one at March’s.
Market participants bet that the Fed’s 25-bps rate hike in February could be its last cycle. This was reflected in the fact that the money market at the time implied no rate rise in March and rates remaining in the range of 4.50-4.75% to 20%. CME data supports this.
However, this month’s string of stronger/hotter-than-expected US data releases, including the January jobs report, CPI report and ISM PMI survey results, has triggered a big shift in the market’s expectations. Markets now predict that the Fed will raise interest rates by 50 basis points (to 5.25-5.5% next month) with the US economy still strong and inflation not too high for comfort.
Interest rates have risen to a peak in the 5.25-5.5% region in June. Money markets suggest that there is a 30% chance they will rise 25 bps to the 5.50-5.5.75% range by July. This has led to a rally in US Dollar Index (DXY), and US yields, especially at the short end, which has been weighing down US stocks.
Crypto has been able rally despite macro headwinds such as weaker stock prices and a stronger dollar. Historically, crypto prices have been hit by higher yields and lower stock prices. Some traders worry that there are more risks of a correction as the rally continues.
Why Fed Hikes Continued Can Impact Crypto
In the past few years, crypto prices, especially those of blue-chip names like Bitcoin, have had a strong positive correlation with US equities. This includes big tech names. This year, however, the correlation has been somewhat weaker with crypto outperforming all major US equity indexes like the S&P 500 and Nasdaq 100.
The correlation between crypto and macro investors is not likely to end soon, as it is still in its early stages. This could pose a problem for crypto in the future. This is because the equity bear markets that started in early 2022 might not be over.
In a note published earlier this week, JP Morgan analysts made important observations. The S&P 500 and other US equity indices have not bottomed prior to the end of the Fed hiking cycle. They usually bottom after the Fed has made a series interest rate reductions.
The Fed is still expected to increase rates by three more times, so it’s not too soon to believe that US equities will bottom. This suggests that the S&P 500, and other major indices, might soon return to their October 2022 lows.
The weak Q4 2022 corporate earnings season strongly suggests an earnings recession in 2023. This is combined with an increasingly toxic outlook on interest rates that could send stocks lower in near-term. Crypto traders should be cautious about getting excited until the US equity outlook improves. The lows of this bear market may be in, as a number of technical and on-chain indicators indicate. However, the outlook for future upside is still difficult.