Fed Chair Powell gave a speech about the US economy and monetary policy on Wednesday, the last day of November, in Washington DC, at the Brookings Institution. His comments sent stocks rallying to their biggest gains this year, while also simultaneously sending the price of cryptocurrencies higher. What exactly did Powell say that caused such a big reaction from investors that even crypto prices that have been reeling from the FTX contagion are bouncing? We give you the low-down below.
Powell Confirms Smaller Hikes to Start From December
Fed Chair Jerome Powell confirmed on Wednesday what other Fed officials have been telegraphing to the market in recent days, that smaller interest rate increases are ahead and this could start in the December meeting. This led to a big rally in equities, with the risk-on sentiment also spilling over to the crypto market as the price of Bitcon rose beyond $17,000 with a gain of around 4.5%, while top altcoin Ethereum grew around 7%, putting a temporary halt to the extreme pessimism that has blanketed the crypto market since the implosion of FTX.
In particular, the Fed chairman’s comments regarding policy moves such as interest rate increases and the reduction of the Fed’s bond holdings requiring some time to make their way through the system and as a result, there is a need to leave some lag for these effects to filter through, was especially welcomed by the market as this comment gives traders room to speculate that a pause in rate hikes could come sometime early next year.
According to CME Group’s options data, the markets had already been pricing in about a 65% chance that the Fed would step down its interest rate increases from 75-bps to 50-bps in December following four such successive increases. Following Powell’s Wednesday speech, that probability has now risen to about 77%.
To quote Powell as saying, “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down, the time for moderating the pace of rate increases may come as soon as the December meeting.”
Powell Did Warn That Rates Could Stay High For Sometime
While Powell said that smaller hikes are coming, he did remind the market that rates could stay elevated for a longer period than previously expected because even though there were promising signs that the rate of inflation is easing, it is still some distance away from their target rate of 2%. Thus, there is a need to keep monetary policy restrictive for some time until real signs of progress emerge out of the inflation numbers.
US Dollar Sees Sharpest Drop in 13 Years
However, the markets ignored Powell’s warning and unanimously decided that Powell’s comments were more dovish than hawkish. This resulted in the US dollar to be dumped heavily as traders bet that the terminal fed fund rates would not touch 5%, when they previously expected it to be around 5.5%. The US dollar index (DXY) fell as low as 104, down from its high of 115 made barely a month ago, sending the US dollar to its fastest and sharpest fall in 13 years. The last time the US dollar fell this much this fast was during the Lehman crisis when the Fed started doing quantitative easing (QE) to pump liquidity into the market.
Despite the sharp fall, the dump in the US dollar does not appear to be finished yet, more US dollar weakness could be ahead as the Bloomberg DXY index has fallen below its 200 day moving average for the first time since July 2021, signalling that the bull run in the US dollar may have come to an end.
How Will This Impact Crypto?
A weaker US dollar is definitely good for the crypto market as the two assets move in opposite directions. After a full year of US dollar strength which has caused crypto prices to sink, the time could finally be here for crypto prices to start rising again as the US dollar begins a bear market.
However, crypto investors should not be too complacent as we are still early in the game and more confirmation from the inflation numbers are needed to confirm the US dollar’s bearish trajectory. Furthermore, the crypto space has its own set of troubles due to the fallout of FTX. The contagion has only just begun to materialise, and unless the price of Bitcoin surges fantastically now, financially strapped Bitcoin miners needing to repay loans may need to dump their Bitcoin in the weeks to come. These factors could still weigh on the crypto market and cause prices to be depressed even with a weaker US dollar.
Furthermore, should world economies plunge into a deeper recession as the effects of restrictive monetary policies start to bite, risky assets may see a deeper selloff, which could drag down the price of crypto assets. However, this also means that global central banks would need to start cutting rates and restart new quantitative easing (QE) programs, which would become the ignition for a new crypto bull market. Market experts are predicting this to start happening in the latter part of 2023 going into 2024, which coincides with the next Bitcoin halving cycle. Thus, once the after effects of the FTX contagion settles, crypto prices would be back on a rising trajectory and we could be looking forward to a better 2023 and a bullish 2024.
The above are the personal opinions of the author and should not be taken as the official view of the Margex platform. They are also not financial advice and are only meant to be informative in nature. Thus, they should not be construed as a solicitation to trade. Readers are strongly encouraged to do your own research, conduct due diligence, and assess your financial abilities before doing any investment or trading as these activities carry risks. Should you be in doubt, kindly speak with your personal financial advisor.