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Analysts believe that the crypto market could suffer some consequences if Fed Chair Powell follows through and raises interest rates.
Analysts believe that the hawkish stance of Federal Reserve Chair Jerome Powell could impact crypto due to its strong correlation with the traditional financial markets
Federal Reserve chair Jerome Powell’s hawkish stance on inflation may not augur well for digital currencies. Analysts and market observers believe this because of the strong correlation between the crypto marketplace and traditional financial markets.
Powell explained the need for higher interest rates to the National Association for Business Economics on Monday. The Chair said the move is necessary to get monetary policy back to a more “neutral level”. However, this view will likely adversely impact the equity markets as well as crypto prices. According to Bannockburn Global Forex managing director and chief market strategist Marc Chandler in a media session:
“Crypto is acting more like a risk asset than an inflation protection.”
Despite the recent rumblings around an imminent drop in crypto prices from higher interest rates, Bitcoin (BTC) is still trading up. Having seen an increase of around 8% from a week ago, the leading crypto is currently changing hands at $42,524.50. However, it remains to be seen how a sustained interest rate hike would affect this price.
There has been a strong correlation between BTC and traditional stock markets over the last few months. In addition, the prominent crypto is down by approximately 30% over the past year, with inflation surging to a record high in forty years.
Powell & the Fed’s Federal Funds Rate Forecast Will Weigh Heavy on Crypto
According to the Fed’s quarterly economic projections and its “dot plot”, the median forecast for the Federal Funds Rate is 2.38% for the long term, according to members of the Federal Open Market Committee (FOMC). Thus, the Fed believes that the “neutral” rate would neither induce nor restrict economic growth.
Nonetheless, the Federal Reserve also expects a marginal increase in interest rate to 2.75% for this year and 2023. As Powell explained on Monday:
“I believe that [our] policy actions and those to come will help bring inflation down near 2% over the next three years.”
This suggests that the US central banking system is not above going higher than the prescribed “neutral” rate to contain inflation next year.
“If this forecast comes to pass, they’re going to lean on the markets; they’re going to want people to lose money. Will that hurt crypto markets and risk markets like stocks? Yes, and that’s part of the plan. They don’t want it to crash, they just want it to slow down,” said James A. Bianco, president and macro strategist at Bianco Research.
In addition, Bianco points out the widespread institutional adoption of crypto as a fundamental problem for the increased link to traditional stock markets. This could be as a direct result of more mainstream money flowing into the digital currency space. With the Fed having to “lean on the traditional financial markets to kill inflation,” Bianco posits that it will be a struggle for the crypto space.