How to prepare for today’s FOMC meeting
Today’s interest rate decision by the US central bank (Fed) and the subsequent press conference by the Federal Open Market Committee (FOMC) could make up for the most important day of the year so far for the Bitcoin price.
In March, the Fed had raised the benchmark interest rate by a further 0.25 basis points (bps). At the time, central bankers left their next steps open. Fed Chairman Jerome Powell clarified that further rate hikes “may be appropriate” and that the decision “will be data dependent.”
Expected 25 Bps despite strong headwinds
Most recently, the consumer price index (CPI) surprised on the upside with an annual decline to 5.0% (from 6.0%), but core inflation is proving very sticky. Nevertheless, the market expects today’s interest rate increase of 0.25 basis points to be the last in this cycle.
According to CME’s FedWatch tool, 89% of market participants believe the Fed will do so today, despite strong headwinds from US policy yesterday. Democratic-led members of Congress called on the Fed to pause rate hikes.
Ten senators and representatives, led by Sen. Elizabeth Warren, expressed concern about the Fed’s monetary policy strategy in a letter to Fed Chairman Jerome Powell on Monday, urging to avoid “a recession that kills jobs and crushes small businesses.”
Another argument against continued aggressive policy is the fact that the fastest rate hike cycle in the Fed’s history has caused deep cracks in the US banking system. Following the fall of Silicon Valley Bank, Signature Bank and First Republic Bank, many other regional US banks plunged deep into negative territory yesterday.
US Regional Bank stock this year:
1. HomeStreet, $HMST: -75%
2. PacWest, $PACW: -71%
3. Metropolitan Bank, $MCB: -64%
4. Zions Bank, $ZION: -51%
5. The Western Alliance, $WAL: -47%
6. KeyCorp, $KEY: -45%
7. HarborOne, $HONE: -39%
8. Valley National, $VLY: -35%
9. Truest, $TFC: -33%…— The Kobeissi Letter (@KobeissiLetter) 2 May 2023
In addition, the recent collapse of First Republic Bank exacerbates the credit crunch: a decline in bank lending due to a sudden tightening of bank deposits. As AP reported yesterday assets were worth less than liabilities at half of the 4,800 US banks.
“It is scary. Thousands of banks are under water, says Professor Amit Seru, banking expert at Stanford University. “We’re not going to pretend this is just about Silicon Valley Bank and First Republic. A large part of the US banking system is potentially insolvent.”
That’s another reason the market continues to call Powell’s bluff. According to CME FedWatch, the market believes that the Fed will not only take a break after today’s meeting, but also cut rates twice this year – unlike the Fed, which in its latest dot plot projects a terminal rate of 5.0% by the end of the year.
Bitcoin Analysis: How to Prepare
A 25 basis point interest rate hike has already been priced in by the market and is not expected to hammer the Bitcoin price. When the interest rate decision is announced at 14:00 EST (20:00 CET), no major volatility should be expected, which will come with the press conference. The only exception is a big surprise: an early break. However, this scenario seems extremely unlikely.
Because of this, all eyes will be on the FOMC press conference at 14:30 EST (20:30 CET). Probably the most important statement from Powell will be whether the Fed will pause interest rates in June. If so, the Bitcoin market is expected to immediately react positively. If Powell denies this statement or says it depends on the data, it would be bearish.
Another focus will be on the issue of interest rate cuts later this year. Especially if Powell emphasizes that the Fed will keep interest rates high until 2024, it will be quite bearish for Bitcoin. The question becomes whether Powell or the market is wrong, and who will pounce first.
Other important statements are expected about the US banking crisis and expectations of a soft landing (recession). Both of these topics have the potential to move the Bitcoin price.
Meanwhile, traders should be careful with the first move, as it often initially goes in the wrong direction. As analyst Ted (@tedtalksmacro) explained, hedges typically liquidate shortly after the announcement. Usually there is a short impulse up/down when these positions are liquidated, and then “real” moves occur when the positions are bought back, which is why the price then falls/rises again.
When the short interest rate is removed, the spot market takes control of the move itself. “This is where you want to keep an eye on what the spot CVDs are doing and if it’s different from how the perps are moving. […] after the press conference we should be able to gauge things more clearly as safeguards will be wound down,” prevails Ted.
At press time, the Bitcoin price stood at $28,623.
Featured image from iStock, chart from TradingView.com
