The US Federal Reserve (Fed) is set to announce its interest rate decision on Wednesday, and the question is not whether it will raise benchmark borrowing costs by 25 basis points (bps), but whether the increase will mark the end of a tightening cycle that began 16 months ago and was partly responsible for last year’s crypto market crash.
With Chairman Jerome Powell holding a news conference half an hour after the announcement at 18:00 UTC (14:00 ET), the Fed is expected to raise rates to a 22-year high of 5.25%-5.5%.
A recent Reuters survey of 106 economists said a majority expected the hike to be the last for some time. Federal funds futures, traders expect the Fed to hold rates steady until early next year. However, some crypto watchers suggest otherwise.
“Looking at the Fed’s Summary of Economic Projections (SEP) from June, the median forecast among Fed officials indicated two 25 bp hikes by the end of the year, but markets didn’t fully buy this view, suggesting one hike (~65%) would be more likely than two (~27% liquid firm), told CoinDesk.
“Our year-end base case remains aligned with SEP forecasts, with another increase expected this year due to the stability of core PCE inflation, the Fed’s preferred inflation gauge,” Kunke said.
It’s not just crypto. Bank of America is expected to raise Fed rates in September.
“We continue to expect a second 25bp hike in September, but action after July is highly dependent on data on the timing of hikes and whether they occur,” Bank of America’s FX global research team said in a note to clients on Friday.
June’s Fed meeting boosted stocks and reduced investor expectations for further tightening, given continued labor market resistance and falling inflation, giving the economy more confidence about a soft landing. Bitcoin rose 16%, mainly on the back of spot-ETF optimism and partly helped by a ‘Goldilocks’ economic scenario.
That means suggestions of further rate hikes after July could see investors take less risk off the table, putting downward pressure on riskier assets, including cryptocurrencies.
“The market expects a 25 bps interest rate hike, but we’ll be watching the language in the FOMC statement and subsequent Powell press conference, leaving the door open to more rate hikes this year, which could put further downward pressure on the market,” Dick Lowe said.
Fed’s Communiqué and Wall Street Sentiment Likely to Underweight Bitcoin: Cryptocurrency’s Correlation with Stocks weakened In the last 90 days.
However, correlations are lagging indicators and can change quickly. And bitcoin’s bullish momentum, bolstered by BlackRock’s ETF filing on June 15, has weakened of late, with the likes of JP Morgan saying any approval is unlikely to be a game changer for the crypto market. On Monday, the cryptocurrency fell more than 3%, diving out of its Bollinger bands to signal the possibility of a volatility breakout.
That means, crypto traders better pay attention to what the Fed says and how traditional markets react.
“I’m looking forward to what tone the Fed will set for the next meetings in September and beyond. We’re at an interesting point with inflation coming down, but favorable fundamentals won’t be evident from here. Also, oil prices have rallied as much as 10% over the past few weeks,” said David Lavant. Potential for a hawkish Fed conversation.
Lavant said the current crypto market activity is reminiscent of 2019, which was marked by excitement within the crypto industry and some apathy from the broader market.
“I expect the (crypto) market to move more broadly with risk assets,” Lowant said.
Tim Frost, CEO of digital wealth platform YieldApp, has warned that it may be too early to celebrate the crypto bull market.
“If Powell’s speech is particularly hawkish, or if the subsequent minutes are sustained or reveal increased hawkish sentiment, this could knock the crypto rally we saw last week to its knees,” Frost said. “Many are already celebrating the start of a bull market, as the SEC’s recent rulings on Binance, Coinbase, and Ripple’s partial victory against the regulator provide some reassurance. However, it was too early to pop the champagne.”