Crypto Industry Weighs Likelihood of Rising Rates as Fed Meeting Kicks Off

Cryptocurrency market participants are closely watching a Tuesday meeting of the Federal Reserve as rising concerns over stimulus pullback and heightened inflation have sent equity and digital assets markets reeling. 

Analysts anticipate interest rate increases starting in March, and this week’s policy-setting meeting may confirm the suspicion. 

“The Wednesday Fed meeting will be critical, and we don’t expect recent market volatility to have softened Chairman Jerome Powell’s stance on rates and balance sheet runoff,” said Nicholas Colas, co-founder of DataTrek Research. 

The meeting of the Federal Open Market Committee (FOMC) comes as the correlation between bitcoin and equities continues to tighten. 

“While bitcoin has historically been uncorrelated to other asset classes, such as equities, bonds, and gold, since March 2020, bitcoin’s rolling 90-day correlation to US equities has been consistently positive,” NYDIG researchers Greg Cipolaro and Ethan Kochav wrote in a recent note. “In the tighter monetary policy era of the past few months, those correlations have increased, as bitcoin has fallen in sympathy with other risk assets.”

Powell has made it clear that the Fed plans on putting its easy money policy days behind it in 2022. 

“It really is time for us to begin to move away from those emergency pandemic settings to a more normal level,” Powell said during congressional testimony earlier this month. “2022 will be the year in which we take steps toward normalization.”

The Fed Funds Futures shifted predictions for rate policy in 2022, now anticipating a Fed Funds rate of 1.0% 12 months from now. This is an increase from the current target of 0.0% – 0.25%. The probability of three rate hikes in 2022 increased to 25.5%, up from 23.5% on Friday. 

But a rocky start to the year – the S&P 500 is down more than 10% year-to-date – has some analysts wondering if the Fed will opt for a more dovish stance. 

“If, in the statement, the Fed does not insert language that says, ‘it will soon be appropriate to alter/adjust policy,’ then the market will take that as a signal that rates might not rise until May or June, and that would cause a powerfully dovish response, given markets have priced in a March hike,” said Tom Essaye, founder of Sevens Report Research. 

The two-day meeting kicked off Tuesday. Central bankers will reveal policy decisions Wednesday.  

---

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.