Where will the crypto market go in 2022 when the Fed rate hike comes into effect?
Where will the crypto market go in 2022 when the Fed rate hike comes into effect?
On March 17, the much-anticipated Fed rate hike finally settled, with the Fed announcing a 25 basis point increase in the target range for the federal funds rate to a level of 0.25% to 0.5%, largely in line with market expectations.
Fed Chairman Powell said: If we think a 50 basis point rate increase is appropriate, we will do so, and we can well conclude that we need to take more action quickly. The Fed has not yet made a decision on the next interest rate adjustment, monetary policy cannot 100% address inflation, and we do not expect to make progress on inflation in the near future.
The Euromoney Institute believes that the Federal Reserve has previously released several hawkish statements in the context of high inflation, indicating that it is imperative to curb inflation through successive interest rate hikes, and the market gave a reaction long before the official landing, with some funds leaving the market in advance to avoid the risks associated with tightening monetary policy, so the market performance was relatively mild after the announcement of the rate hike.
It is worth noting that this rate hike, the first by the Fed since December 2018, is just the beginning of what will be a succession of benchmark rate hikes that will follow and affect financial markets around the world. The tapering plan, which will be announced in May at the earliest, will also bring more uncertainty to the market.
Why is the Fed raising interest rates?
While the world is focused on the Fed raising interest rates and why, let's first talk about who the Fed is. The Federal Reserve is the largest holder of U.S. federal debt. The U.S. Federal Reserve System consists of the Federal Reserve Board in Washington, D.C., and 12 regional Federal Reserve Banks located in major cities across the country. The actual function is the central bank of the United States. The Fed receives its authority from the U.S. Congress and exercises responsibilities such as setting monetary policy and regulating U.S. financial institutions.
The Federal Reserve, as the central bank of the United States, has the dual mission of maintaining price stability and promoting full employment. And interest rates are one of the most important tools for the Fed to reach its policy goals, as they can affect both the unemployment and inflation rates.
As we know through economics, a rate cut would stimulate employment but could trigger inflation, with cryptocurrencies and gold becoming financial investment targets. Conversely, an interest rate increase can dampen inflation and cool economic growth. A rate hike then leads to higher interest rates, reduced social capital flows and lower consumer demand.
For ordinary users, banks raise interest rates and start a new round of deposit fever. Unlike before when interest rates were low, users invested their money in financial products such as funds, stocks, gold and cryptocurrencies to fight inflation by getting annualized interest rates. And once the interest rate is raised, the funds flow back to the bank deposits, most of the funds are locked in the bank, resulting in less funds in the market, the amount of funds for financial products plummeted, the interest rate increase is a big negative for the financial market.
Interest rate hikes instead inhibit consumption, so why should the Federal Reserve raise interest rates? Today, global economic integration has become a foregone conclusion, the dollar-led monetary system is also under strong threat, the Federal Reserve by raising interest rates to develop the U.S. economy through monetary policy adjustments, while for other countries but indirectly evolved into financial harvesting.
Along with the global epidemic and other black swan events, also accelerated the global capital flow back to the United States. Along with the increase in U.S. interest rates, global capital will flow to places with high interest rates, and many countries will follow the Fed's synchronized interest rate hikes to maintain the exchange rate of their currencies with the U.S. dollar in order to avoid capital outflows.
And the development of backward countries once followed by the Fed to raise interest rates, but inhibit the country's economic development, resulting in the real economy out of food, squeeze the country's asset bubble. So the world is watching the Fed rate hike, if some countries do not follow the rate hike, it will cause capital outflows, devaluation of their currencies, but also on economic development.
Why is a rate hike a big negative for global financial markets?
The Fed's rate hike has led to a number of central banks around the world to follow suit, reviewing the interest rate resolutions of major central banks over the past week, the Bank of England raised its benchmark interest rate from 0.5% to 0.75%; the Bank of Japan kept its benchmark interest rate unchanged at -0.1%, keeping the 10-year Treasury yield target unchanged around 0%; the Central Bank of Brazil raised its interest rate by 100 basis points to 11.75%. The Fed's rate hike was actually within expectations, and the entire global market performed adequately in anticipation of the hike, with the market having reacted in advance and not being dramatically affected.
Combined with the uncertainty of the Russia-Ukraine situation, global capacity issues, global supply chain issues and global energy revolution issues will emerge. Commodities and crude oil rose sharply, with U.S. WTI crude oil futures prices once topping $130 per barrel, gold soaring to a new all-time high of $2,058 per ounce, and cryptocurrencies continuing to weaken after a brief period of high gains.
The Fed rate hike caused a general decline in global financial markets, pushing up the price of commodities, with wheat futures prices soaring from $8 per bushel to more than $12. The U.S. Consumer Price Index surged 7.9% year-over-year in February, a 40-year high, according to the U.S. Department of Labor. And inflation-adjusted average hourly earnings fell 2.6% year-over-year in February, the largest drop since May last year and the 11th consecutive monthly decline.
Previously, the outbreak of the new crown epidemic forced the Federal Reserve to release water, temporarily stabilizing the pace of the U.S. recession and also driving the continued rise of cryptocurrencies. The money printed by the Fed due to the epidemic always needs to be supported by real assets, and the interest rate hike is ultimately to make global assets flow to the US to support the US economic recovery, improve the initiative of the US dollar and solidify its hegemony in the world. But the impact of interest rate hikes on the liquidity of global financial markets is huge, and there may even be local conflicts and other black swan events, after all, the war is behind the economy.
How will the Fed rate hike affect cryptocurrencies?
The Federal Reserve raised interest rates as the dust settled, announcing that it raised the target range for the federal funds rate by 25 basis points to a level of 0.25% to 0.5%, lowered the median GDP growth estimate for this year by 1.2 percentage points to 2.8%, and raised the median inflation estimate, the core PCE price index, for this year by 1.4 percentage points to 4.1%. The Fed Chairman Jerome Powell said the Fed's top priority is to restore inflation to 2%, and that tapering, which amounts to a disguised increase in interest rates, is an effective tool for tightening monetary policy.
The rate hike, the first by the Federal Reserve since December 2018, also affects the cryptocurrency market. Euromoney Institute believes that the rate hike will lead to a reduction in market liquidity, bank interest and Treasury yields will rise, and the US dollar will appreciate. The money invested in finance returns to the bank, treasury bond and dollar markets. There is also a huge impact on the cryptocurrency market, with cryptocurrencies facing the risk of selling off and a large amount of money flowing from the crypto circle to sound investments, and the interest rate hike means that excess liquidity is being extracted from the financial market. The support for crypto asset markets is weakened, creating more uncertainty.
The Fed raised interest rates again after 1,183 days, and looking back at the Fed rate hike in 2018, global economic growth momentum declined, demand slowed, the U.S. economy was in a mild recovery during the rate hike cycle, and inflation did not reach a high point. On the contrary, the trend of cryptocurrencies, bitcoin fell from $13,234 at the beginning of 2018 to $3,638 at the end of 2018, through the following K-line trend of bitcoin on the Euromoney trading platform, it is concluded that the impact of the Fed rate hike on cryptocurrencies at that time was still great.
If the Fed continues to follow its plan and execute six consecutive rate hikes, the impact on cryptocurrencies will be huge. Bitcoin did not open a downward path in the face of this Fed rate hike announcement, but crypto assets were already in decline mode as early as the end of last year when the Fed announced it would begin scaling back bond purchases and hinted at rising interest rates. Cryptocurrency investor Michael Novogratz said bitcoin will likely continue to trade in a price range this year without a significant increase as the Fed raises interest rates.
The Wall Street Journal reported that the Federal Reserve's first rate hike in more than three years kicked off a series of subsequent rate hikes with the goal of preventing the U.S. economy from overheating and controlling inflation, which is at a 40-year high. Going forward, the game of interest rates versus inflation presents both challenges and opportunities for crypto assets.
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