Fed Minutes Predict More Rate Hikes-That Affect Crypto

The US Federal Reserve is going to raise interest rates again. At least, that’s what we can tell from the minutes of the Federal Open Market Committee (FOMC) meeting from February 1 that came out this Wednesday. This could be a big problem for crypto in the middle term.

Fed Minutes Predict More Rate Hikes

At their meeting earlier this month, the FOMC, which is made up of Federal Reserve Governors and regional Fed Presidents, raised interest rates by 25 basis points to a range of 4.50–4.75%. That was a slowdown after a 50 bps rate increase at the last meeting of 2022 and four 75 bps rate increases in a row.

According to the meeting minutes, FOMC members think that interest rates will need to go up, even more to get inflation back to the target of 2% and keep it there. “Almost all” of the FOMC members agreed that rate hikes should be slowed down to 25 bps. The minutes said that “upside risks to the inflation outlook remained a key factor in shaping the policy outlook,” and a few officials warned that an “insufficiently restrictive” stance could slow down efforts to bring down inflation.

Hot US Data Forces Markets to Up Fed Tightening Bets

The latest Fed meeting minutes come out after the financial markets have been betting more on the Fed tightening over the past few weeks. To be more specific, at the end of January, most analysts expected only two more 25-bps increases in interest rates. One was expected at the meeting in February, which happened, and the other was expected at the meeting in March.

Some people in the market even thought that the Fed’s 25-bps rate hike in February might be the last one this cycle. At the time, CME data showed that the money market implied that there wouldn’t be a rate hike in March and that rates would stay in the 4.50-4.75% range. This showed that this was likely to happen.

But this month’s strong/hotter-than-expected US data releases, such as the January jobs report, CPI report, and ISM PMI survey results, have caused the market’s expectations to change a lot. The US economy is still doing well, and inflation is still too high for comfort. Based on what the markets are saying, there is a 27% chance that the Fed will raise interest rates by 50 basis points (bps) next month, to 5.25-5.50%.

On the other hand, interest rates are now expected to reach their peak in the range of 5.25-5.5% in June, and money markets show that there is a 30% chance that they will go up another 25 bps to the range of 5.50-5.75% by July. This has caused the US Dollar Index (DXY) and US yields to go up, especially at the short end of the yield curve. This has been putting pressure on US stocks lately.

Even though stock prices are falling, the dollar is getting stronger, and interest rates are going up, crypto prices have been going up so far. But as the rally goes on, some traders are worried that a correction is becoming more likely.

Why Continued Fed Hikes Can Hit Crypto

In the last few years, the prices of major cryptos like Bitcoin and Ethereum have had a strong positive correlation with the prices of US stocks, especially big tech stocks. This year, that link has gotten a little bit weaker, and crypto has done much better than the S&P 500, the Nasdaq 100, and the Dow Jones Industrial Average.

But since crypto is still in its early stages and most macro investors still see it as “risk assets,” the correlation is not likely to break down completely any time soon. This could be bad for crypto in the future. That’s because the stock market downturn that started in early 2022 might not be over yet.

In a note that came out earlier this week, analysts at JP Morgan made some important points. US stock market indices like the S&P 500 have never hit bottom before the end of a Fed rate-hiking cycle. Instead, they usually hit bottom after the Fed has cut interest rates several times.

In other words, since the Fed is still expected to raise interest rates three more times, it’s probably too soon to bet that US stocks have reached their bottom. The implication is that the S&P 500 and other major indexes could soon be headed back to their lows for 2022, which were printed in October of last year.

A combination of a weak Q4 2022 earnings season, which is a strong sign that an earnings recession is coming in 2023, and a worsening outlook for interest rates could send stocks down in the short term. Crypto traders shouldn’t get too excited until the outlook for US stocks gets better. There are a lot of on-chain and technical indicators that point to this being the case, but it’s still hard to see how the market will go up from here.

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