Crypto Rises as Fed Acknowledges Disinflation

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Cryptocurrency prices soared on Wednesday following more dovish than expected remarks from Fed Chairman Jerome Powell, who was speaking as usual at the post-policy announcement press conference. Fed. Risky assets, including stocks, surged as Powell acknowledged the central bank had made progress in tackling inflation and said the “process of disinflation had begun”.

Powell’s comment came shortly after the Fed announced a widely expected 25 basis point hike in the fed funds target range to 4.50-4.75%. Bitcoin was last trading near $23,700, now up around 2.7% on the day and closer to 4.0% from its previous post-Fed lows in the $22,700s. .

Ethereum recorded an even more impressive final rise of over 3.5% on the day in the $1,640s. The world’s second-largest cryptocurrency by market capitalization is now threatening an upside breakout of a near-term pennant structure that would open the door for a quick run towards resistance in the $1,800 area. Meanwhile, major altcoins like Cardano, Solana, Polygon, and Polkadot are all up 4-8% from their pre-Fed policy announcement levels.

Powell misses a chance to drive markets lower

Powell was lucky to fend off the recent easing in financial conditions (i.e. the rise in stocks and cryptos in January and the decline in the US dollar and yields). However, he said the Fed was focused on long-term economic trends, not short-term market movements.

Many strategists had warned ahead of today’s Fed meeting that Powell may be considering stepping up on harsh comments to assuage ‘animal spirits’ in the market, on the assumption that the Fed does not want to a premature easing of financial conditions. complicate their task of bringing inflation back to the 2.0% target.

As it happens, the harsh words designed to drive the market higher were not there, hence the rebound in assets like crypto. However, in its statement, the Fed said continued rate hikes were still needed and “a few” more hikes would likely be warranted. This could be at odds with the market’s baseline scenario which assumes that there will be only one 25 basis point rate hike (in March) before the end of the hike cycle.

Either way, the crypto now apparently has the green light to rally in the near term. Short positions therefore remain at risk, having been wiped out over the past few hours following Wednesday’s post-Fed rally in the crypto space. Data from Coinglass.com shows that short position liquidations increased following the Fed meeting, suggesting that a short squeeze could continue to support the market.

But can crypto rally if the US heads into recession?

All smiles among crypto investors this Wednesday. But the post-Fed rally could quickly unravel. Big tech giants including Meta Platforms, Amazon, Apple and Alphabet are all reporting earnings over the next two days. And so far, fourth-quarter earnings for S&P 500 companies have generally pointed to the same thing: an earnings recession.

Indeed, the US economy is rapidly stagnating, largely due to the lagged impact of the Fed’s aggressive hike cycle in 2022. The consensus among macro analysts is that the US economy will have fallen into recession over the next quarters. Popular macro analyst Alfonso Peccatiello recently explained in an in-depth Twitter thread why he expects a recession in four to five months.

Essentially, major economic indicators including the Global Credit Impulse, Conference Board Leading Index, Housing Market and Philadelphia Fed New Orders Index all point in that direction. A recession in the United States means that the recession in US corporate earnings is likely to get worse.

There is a risk that this prevents equities from benefiting from any optimism about a less hawkish Fed. And crypto has generally been closely correlated to stocks over the past few years. The question for investors, therefore, is whether the crypto can weather a US recession, even if economic weakness forces the Fed to adopt a harder dovish pivot.

Based on the experience of recent years, the answer might be yes. The 2020 pandemic shutdowns plunged the US economy into a short but deep recession. After an initial sell-off amid the panic caused by the spread of Covid-19, the crypto came back stronger than ever as the Fed cut interest rates to zero and the US government launched a fiscal stimulus without previous.

Each cycle is different. The Fed is unlikely to cut rates to zero as quickly as in 2020. And the US government lacks the ability to continue the kind of stimulus it did in 2020 and 2021. But an easing of conditions Financials in 2023 may well underpin crypto, even if a US recession means we don’t get as aggressive of a bull market as we did at the end of 2020/2021.

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