Can the Federal Reserve’s Counterattack Stop Crypto Bull Run?

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The crypto industry could face a major setback as the Federal Reserve (FED) appears to lose control of the markets. This new status quo could lead to even more hawkish measures impacting traditional and cryptocurrency markets.

A report published on January 29 by Michael J. Kramer – founder of Mott Capital, suggests that the FED must “push the market back before it’s too late”. Since December’s Federal Open Market Committee (FOMC) meeting, financial conditions have eased considerably.

This easing in financial conditions led to higher commodity prices, lower mortgage rates, a weaker dollar, and a rally in stocks and major crypto assets including Bitcoin, Ethereum and others.

According to Kramer, the Federal Open Market Committee (FOMC) meeting in February will be crucial as the FED will have to reverse the current easing of financial conditions. Moreover, the founder of Mott Capital believes that these current market conditions are at the same level as when the FED started raising interest rates.

For Kramer, pushing back at this point may be even more complex and tricky than when Fed Chairman Jerome Powell gave his speech in Jackson Hole. The challenge for the financial institution is to restore price stability by “relaxing” working conditions.

As a result, the Fed raised interest rates. Their goal is to lower inflation, leading them to use “powerful tools to better balance supply and demand”.

Moreover, according to Kramer’s report, investors know that the FED is closer to the end of its bull cycle than the beginning. The market also expects inflation to continue its downward trend. Thus, any aggressive action by the financial institution could surprise the legacy and crypto market, causing greater than expected losses.

In his analysis, Michael J. Kramer indicates that the FED has two options: raise rates by 50 basis points (bp), which could be a big surprise for the markets, or signal that financial conditions have eased too much, which could prolong the rate. tightening cycle.

What cards did the FED leave under the sleeve

The Fed’s options are limited at this point. Kramer says the market doesn’t believe the FED when it wants monetary policy to be tight enough and willing to endure current market conditions to kill any inflationary impulses that still exist.

For Kramer, the FED may go against the collective belief that it will only raise rates by 25 basis points and instead raise rates by 50 basis points. Powell could also deliver a more vital message than he did in Jackson Hole last year.

If not, the Fed may have to raise the question of a possible acceleration in the pace of quantitative tightening and unwinding of the balance sheet. In short, Kramer thinks anything other than the options above would suggest that the FED is comfortable with the current easing of financial conditions and is willing to let the market take control and conduct monetary policy.

How will the crypto market react?

The crypto industry has high expectations for the Federal Market Committee meeting this week and Powell’s speech. Digital assets face major resistance lines after volatility spikes since the start of 2023.

It feels like a race against time and government action to see how investors and prices react to potentially more hawkish measures. The capitalization of the crypto market has increased and the tightening measures could lead to another crash for cryptocurrencies.

BTC moving sideways on the daily chart. Source: BTCUSDT Tradingview

The vast majority of cryptocurrencies follow the price action of Bitcoin (BTC), and since the weekend, Bitcoin has undergone a slight correction. As of press time, Bitcoin has failed to gain higher territory, dropping 1.6% in the past 24 hours, selling at auction at $23,140, ​​a gain of 1.9% in the last seven days.

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