Rally for Bitcoin stalled? Not so fast! Here’s why

Yesterday’s Federal Reserve (FED) FOMC meeting turned out to be more hawkish than many Bitcoin investors and the financial market expected. As expected, the FED raised interest rates by 0.5 percentage points on Wednesday. This brings interest rates to a range of 4.25-4.5%, the highest level in 15 years.

But overall, central bankers expect the rate to be higher next year than initially expected, which may have been the biggest influencing factor in yesterday’s bitcoin and crypto market reaction.

FED is more Hawkish than expected

The revision of the FOMC dot plots showed that policymakers on average expect to raise rates up to 5.1% in 2023 before lowering it to 4.1% in 2024. That means the Fed would need to raise the Fed Funds rate another 0.75bps in 2023. Whether it will happen in three steps or less is something Powell refused to commit to on Wednesday.

– More important than speed is the question of how high interest rates must eventually rise and how long we will stay at that level, said Fed Chairman Jerome Powell.

During yesterday’s FOMC press conference, the Fed chairman proved to be extremely hawkish. At least he tried to emphasize this again and again.

Investors had hoped that interest rates would rise less sharply in the coming year and are now worried that the Fed could trigger a recession in the US with its policy. However, Powell stressed that the Fed is “determined” to bring the inflation rate back to its 2% target. But “there is still a long way to go before that happens.”

In addition, the FED chairman emphasized that he wished there was “a painless way” to fight inflation. But it is not.”

Economists react to Powell’s speech

The fact that the Bitcoin price did not plunge lower after Powell’s comments yesterday may also be due to the market not believing Powell’s words.

The Fed’s hawkish policy increases the risk of sending the economy into a recession. In this case, “the political pressure on Powell would increase,” indicated former Fed Governor Frederick Mishkin. After all, Mishkin argued, it would then be especially difficult to raise interest rates further when the economy was already in bad shape.

Star investor Jeffrey Gundlach of Double Line Capital expects a recession in the first half of 2023 when the Fed will “do a U-turn and cut interest rates again,” he said Monday at an online event.

The concern that monetary policymakers could do major damage to the economy outweighs the will to fight inflation, he said. “Although central bankers are saying otherwise at the moment.”

Lisa Abramowicz of Bloomberg Surveillance described the sentiments of many analysts on Twitter as following:

Fed: We are hawkish! We have more work to do! The market: Got it, so you’re taking another step down to a 25 bp interest rate hike in February and will cut interest rates later in the year. Have it.

Abramowicz bases this assumption on the fact that Powell repeatedly spoke of the Fed’s “best estimates as of today.” Powell may thus have given the green light for an increase of 25 basis points in February.

Tom McClellan of “The McClellan Market Report” wrote via Twitter that Fed rate hike cycles typically end when the Fed Funds rate reaches the level that the 2-year rate has already reached.

“We have that condition now. So the Fed should stop, but there is no indication that they know it, based on the post-meeting announcement,” McClellan wrote, referring to the chart below.

Bitcoin rejected by major resistance

Bitcoin price has seen a strong run ahead of the FOMC meeting, but has held up very well despite a hawkish Powell. A look at the daily chart reveals that BTC is somewhat overextended and was rejected at $18,220.

Therefore, it seems likely that Bitcoin will have a consolidation, for now, in search of a higher low. The range to hold is currently $17,200 to $17,400.