Crypto Markets Dive After Another Rate Hike From The Fed

By September 22, 2022DeFi
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Ether Down 4% in Last 24 Hours After Stabilizing Overnight

Global markets took a beating after the U.S. Federal Reserve announced a 0.75% interest rate hike on Sept. 21.

After an initial bout of volatility that saw Bitcoin and Ether make news daily highs above $19,900 and $1,400 respectively, crypto markets swiftly reversed lower.

Ether posted a loss of nearly 6% while Bitcoin ended the day down 2%. In early morning trading U.K. time, ETH had stabilized and is down 4% over the last 24 hours.

More Hikes To Come

Fed chair Jerome Powell indicated in his opening remarks that he anticipates ongoing rate increases to be appropriate in order to bring inflation down to the Fed’s target of two percent.

Jordi Alexander, the CIO of Selini Capital, noted that the Fed’s summary of economic projections shows the federal funds rate topping out at 4.6% in 2023. Alexander described this stance to The Defiant as leaning on the hawkish side.

After today’s hike, the target federal funds rate stands at between 3% and 3.25%, meaning that a further increase of 1.5% would be needed to hit that level in 2023.

FOMC Rate Projections

Conversely, Alexander noted that the “longer run” rate projection was around 2.5%, indicating the Fed anticipates a drop in rates of over 2% from the projected 2023 peak.

Monetary Tightening

The Fed also indicated that it will continue to reduce its holdings of Treasury securities and other assets. This process is called quantitative tightening and reduces the circulating money supply which, in turn, makes investment capital more expensive.

Leading up to today’s Fed meeting, 82% of traders anticipated a 75 basis point hike, according to the Chicago Mercantile Exchange (CME) FedWatch tool. The CME estimates these probabilities using futures contracts based on the federal funds rate.

As of 10pm ET, nearly 65% of traders expect another 0.75% hike in November.

Inflation Concerns

Consumer prices in the U.S. are rising at the fastest pace in four decades, according to data released by the Bureau of Labor Statistics. This persistent increase in prices has put pressure on the central bank to raise rates to cool the economy.

Higher interest rates make U.S. Treasury bonds more appealing, which can suck up capital from riskier asset classes like stocks and crypto.

“Powell attempted to continue his hawkish rhetoric from Jackson Hole where he was unequivocal that inflation was their only current mandate,” Alexander said. The Fed chair focused almost exclusively on the problem of inflation in his Jackson Hole speech in August.

The investor thinks that Powell had to concede that incoming data could shift the Fed’s focus away from inflation.

Dollar At Two-Decade High

The US Dollar Index (DXY), a broadly used index that represents the dollar’s relative value against other world currencies, stands at its highest level since June 2002.

US Dollar Index (Monthly). Source: TradingView

“I think that market participants took a look at the strengthening dollar in reaction to the initial announcement and are starting to call the bluff on Powell,” Alexander said. “It’s likely that if [the Fed] pushes much further from here, the dollar will wreck the world economy and force a pivot next year.”

Updated with new ETH price action on Sept. 22.

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