The Federal Reserve’s recent policy signal has sent shockwaves through financial markets and had a significant effect on cryptocurrency, particularly Bitcoin. By lowering its policy rate by 25 basis points to 3.75-4.00 percent range, they made clear that their December rate cut is no longer guaranteed; markets now estimate an 18 percent chance of rate hike instead.
CryptoSlateerite (+1).
What Has Changed with Fed Guidance?
Before its recent decision, markets had expected the Federal Reserve to cut interest rates again this December in response to signs of inflation easing and labour-market softness. Yet Chair Jerome Powell made clear in his post-meeting press conference:
CryptoSlate With this guidance in hand, futures markets dramatically reduced the probability of a December cut (from near 96% to almost zero) while raising January hike chances to 18%.
CryptoSlate Its This shift from the Federal Reserve suggests it anticipates inflationary or growth pressures will remain more persistent than anticipated, suggesting interest rates may stay elevated longer. As such, their policy path now appears less to be one of gradual easing and more of an “evidence-dependent” hold or possible reversal. mint
Implications for Bitcoin and Crypto
Higher-for-longer interest rate expectations have significant ramifications for risk assets – including bitcoin. Here’s how the changes to Fed outlook is impacting crypto sentiment:
Liquidity and Risk Appetite: Expectations that interest rates are going down lead to reduced borrowing costs and encourage risk taking; now that these expectations have lessened, Bitcoin’s risk-on impulse may begin to diminish.
Strengthening Dollar and Real Yields: Any delay or potential hike tends to strengthen the U.S. dollar and real yields, both of which tend to exert upward pressure on high-beta assets like cryptocurrency.
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Volatility Regime Shift: With policy paths becoming more uncertain (wider “hike tail”), crypto markets could experience elevated volatility as investors shift away from speculation into higher quality assets.
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While bitcoin has seen less of a drawback than some smaller altcoins, its rally seems to have stalled as investors reassess expectations and adjust expectations for crypto assets as a whole. What This Means for Markets
The shift in Federal Reserve guidance carries wider market implications:
Stocks & Bonds: Equities markets may experience some headwinds due to concerns surrounding growth-oriented and technology stocks susceptible to higher yields, while bond yields could drift higher as easing of monetary policy becomes less assured.
Credit and Risk Premiums: As credit and risk premiums fluctuate in response to low rate regimes, markets may require higher risk premia for speculative assets and carry trades (typically encouraged under such regimes) may become less appealing.
Crypto as a Macro Play: Bitcoin’s place as a hedge for rate cuts has diminished somewhat; as its performance now depends more on fundamentals such as adoption, regulation and ETFs than solely macro liquidity.
Investors will closely observe upcoming economic data–particularly inflation, employment and growth figures–to assess whether or not the Federal Reserve’s cautious stance warrants further hikes; otherwise, softening economies might open the path towards cuts later this year.
As far as crypto markets go, one key takeaway from recent macro events is that their macro environment is less accommodating than many had anticipated. While that does not signal imminent collapse for bitcoin and risky assets generally, allocators may prefer those assets with stronger balance sheets and clear use cases during market reassessments.
As previously discussed, the Federal Reserve’s abandonment of an automatic December rate cut and newfound “hike tail” of 18% mark an important turning point in monetary-policy history. Bitcoin and the broader crypto space may experience some restraint rather than full acceleration from this decision, possibly prompting it to slow its momentum rather than resume full force.
