More Rate Hikes Ahead, According to Latest Fed Meeting Minutes – Here’s What It Means for Crypto
Several interest rate increases are coming from the US central bank. At least that was the takeaway from the recently released minutes of 1St the February meeting of the Federal Open Market Committee (FOMC) earlier this Wednesday. This could be a major medium-term headwind for crypto.
The FOMC, made up of a selection of Federal Reserve governors and regional Fed presidents, raised interest rates 25 bps to a target range of 4.50-4.75% at their meeting earlier this month. It was a decline after a 50 bps rate hike at the last meeting in 2022, which was followed by four consecutive 75 bps rate hikes.
Meeting minutes said FOMC members expect further rate hikes will be needed to ensure inflation returns sustainably to the 2.0% target. “Almost all” FOMC members supported the cut to 25 bps rate hikes. “Upside risks to the inflation outlook remained a key factor shaping the outlook for policy,” the minutes said, while a few officials warned that “sufficiently restrictive” stance could hamper progress in bringing down inflation.
Hot US Data forces markets to increase Fed tightening efforts
The latest release of Fed meeting minutes comes after financial markets have spent the past few weeks ramping up their Fed tightening sentiment. To be more specific, at the end of January most analysts were predicting just two more 25bps rate hikes – one at the February meeting, which was delivered, and then a final one at the March meeting.
Some market participants were even betting that the 25 bps rate hike in February could be the Fed’s last this cycle. That was represented by the fact that the money market at the time suggested the likelihood of no rate hike in March, and rates remaining in the 4.50-4.75% range were around 20%, according to CME data.
However, this month’s string of stronger/warmer than expected US data releases, including the January jobs report, CPI report and ISM PMI survey results, have triggered a major shift in market expectations. With the US economy still humming along and inflation still too hot for comfort, markets are now suggesting a 27% chance the Fed could raise interest rates by 50bps (to 5.25-5.50%) next month.
Meanwhile, rates are now seen peaking in the 5.25-5.5% range in June, with money markets suggesting around a 30% chance of them moving another 25bps higher to the 5.50-5.75% range by July . This has sparked a rally in the US Dollar Index (DXY) and US yields, particularly at the short end of the curve, and has weighed on US stocks of late.
Crypto has so far been able to rally, despite these macro headwinds – weaker equity prices, a stronger dollar and higher yields have historically hit cryptocurrencies. But as the rally widens, some traders worry that the risk of a correction is increasing.
Why continued Fed hikes could hit crypto
Crypto prices, especially the prices of big blue chip names like Bitcoin and Ethereum, have in recent years had a fairly strong positive correlation to US stocks, especially big tech names. This correlation has weakened somewhat this year, with crypto far outperforming all major US stock indexes such as the S&P 500, Nasdaq 100 and Dow Jones Industrial Average.
However, with crypto still in its early days and still very much viewed by most macro investors as a “risk asset”, the correlation is unlikely to break down completely anytime soon. And that could be a problem for crypto going forward. That’s because the stock market that started in early 2022 may not be over yet.
Analysts at JP Morgan made some important observations in a note released earlier this week. US stock indexes such as the S&P 500 have never bottomed until the end of the Fed’s rate hike cycle, and usually bottom only when the Fed has already made a series of rate cuts.
In other words, with the Fed still expected to deliver three more rate hikes, it’s probably far too early to bet that US stocks have bottomed out. The implication is that the S&P 500 and other major indexes could soon be heading back towards their 2022 lows printed last October.
A weak corporate earnings season in Q4 2022, which strongly suggests an earnings recession is on the way in 2023 combined with an increasingly toxic interest rate outlook, could certainly send stocks down in the near term. Until the outlook for US stocks improves, crypto traders should temper their excitement. Perhaps the downsides for this bear market are in – a litany of chain and technical indicators suggest this is the case – but the outlook for further upside remains difficult.
