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Further interest rate hikes by the US Federal Reserve Board (Fed) are expected. At least, that was the gist from one recently released proceedings.st February meeting of the Federal Open Market Committee (FOMC) this Wednesday. This could be a major medium-term headwind for cryptocurrencies.
The FOMC, which consists of a series of Federal Reserve Boards and regional Fed Boards, raised interest rates by 25 bps to a target range of 4.50-4.75% at its meeting earlier this month. This was a slowdown following a 50 bps rate hike at the final meeting in 2022, followed by four consecutive 75 bps rate hikes.
The minutes of the meeting said FOMC members expected interest rates to rise further to ensure a sustained return to the 2.0% target for inflation. “Almost all” of his FOMC members favored a slowdown to a 25 bps rate hike. “Upside risks to the inflation outlook continue to be a key factor shaping the policy outlook,” the minutes said, but some officials said the “insufficiently restrictive” stance would hamper progress in lowering inflation. warned of the possibility.
Hot U.S. data pushes markets to tighten bets on Fed tightening
The release of the latest Fed meeting minutes comes after financial markets have increased bets on a Fed tightening over the past few weeks. Specifically, in late January most analysts were expecting two more 25-basis-point rate hikes from him.
Some market participants even predicted that February’s 25 basis point rate hike could be the Fed’s last rate hike of the cycle. That was due to the fact that, at the time, money markets were suggesting a possible no rate hike in his March, with interest rates hovering in the 4.50-4.75% range, around 20% according to CME data. was represented.
But this month’s stronger-than-expected or better-than-expected set of US data, including January’s jobs report, CPI report, and ISM PMI survey results, has caused a big shift in market expectations. . With the US economy still performing well and inflation continuing to trend higher, the market suggests a 27% chance that the Fed will raise rates by 50 bps (5.25 to 5.50%) next month.
Meanwhile, interest rates peaked in the 5.25-5.5% range in June, suggesting about a 30% chance that money markets could rise another 25 bps to the 5.50-5.75% range by July. doing. This has pushed the US dollar index (DXY) and US yields higher, especially on the short end of the curve, weighing on US stocks recently.
Despite these macro headwinds, cryptocurrencies have been able to bounce back so far – weak stocks, a strong dollar and higher yields have historically hit crypto prices. Some traders fear a correction risk is mounting as the rally continues.
Why Continued Fed Rate Hikes Will Hurt Cryptocurrencies
Cryptocurrency prices, especially those of major blue chip stocks such as Bitcoin and Ethereum, have had a fairly strong positive correlation with U.S. stocks, especially big tech companies, over the past few years. That correlation has weakened somewhat this year, with cryptocurrencies far ahead of all major US stock indices such as the S&P 500, Nasdaq 100 and Dow Jones Industrial Average.
However, since cryptocurrencies are still in their early days and most macro investors still consider them “risky assets,” the correlation is unlikely to collapse completely any time soon. That could be a problem because the bear market in equities that started in early 2022 may not be over yet.
JP Morgan analysts made some key observations in a note released earlier this week. No, it usually bottoms out only after a series of Fed rate cuts.
In other words, with the Federal Reserve expected to raise interest rates three more times, we can expect US stocks to hit a bottom soon. This means the S&P 500 and other major indices could soon return to the 2022 lows hit last October.
A weak corporate earnings season in the fourth quarter of 2022 strongly suggests an earnings recession is imminent in 2023, combined with a damaging interest rate outlook that could certainly drive stocks lower in the near term. There is a nature. Until the outlook for US stocks improves, crypto traders should temper their excitement. Perhaps the bottom of this bear market has arrived – many on-chain and technical indicators suggest this is the case – but prospects for further upside remain bleak.