Summary
• The Federal Reserve has indicated that more rate hikes are on the way, according to the minutes of the February 1st FOMC meeting.
• This could be a major medium-term headwind for crypto.
• Financial markets have responded by increasing their Fed tightening bets, with interest rates now seen peaking in the 5.25-5.5% range in June.
The Latest Meeting of the Federal Open Market Committee
At its meeting earlier this month, the Federal Open Market Committee (FOMC) – comprised of an assortment of Federal Reserve Governors and regional Fed Presidents – raised interest rates 25 bps to a 4.50-4.75% target range. This was a slowdown following a 50 bps rate hike at the last meeting of 2022, which was proceeded by four consecutive 75 bps rate hikes.
The Significance of The Meeting Minutes
The recently released minutes from this meeting indicated that members expect further increases to interest rates will be necessary in order to ensure that inflation returns sustainably back to the 2.0% target. “Almost all” FOMC members backed the slowdown to 25 bps rate hikes and there were some warnings given about an “insufficiently restrictive” stance on policy possibly hampering progress on bringing down inflation.
Market Reactions
In response to these developments, financial markets have spent recent weeks increasing their Fed tightening bets, with most analysts forecasting two more 25 bps interest hikes – one at February’s meeting (which was delivered) and then a final one at March’s meeting . However, hot US data releases over January have shifted market expectations so that they now imply a 27% probability that the Fed might raise interest rates by 50 bps (to 5.25-5.50%) next month, while money markets imply around a 30% chance for further increases up to 5.50-5.75%.
Implications for Crypto
This could be major medium-term headwind for crypto as higher interest rates usually lead to increased demand for traditional assets such as bonds over cryptocurrencies like Bitcoin which are not paying any yield at present moment..