– The Federal Reserve increased interest rates by 0.25% on Wednesday, but the market is expecting that the hiking cycle is coming to an end.
– Optimism has returned to the cryptocurrency markets, which saw massive losses in 2022 as rates rose.
– While the Fed is no longer forecasting a recession, this could be a double-edged sword for crypto.
– It is unlikely that the Fed will cut rates any time soon, and this could restrain crypto.
– Despite the brighter macroeconomic environment, caution may be the best approach for crypto investors.
Following the 0.25% increase in the federal funds rate on Wednesday, the most important interest rate in the economy is now 525 bps higher than pre-March 2022. This has been a difficult transition for the cryptocurrency market, which has seen prices drop in line with the rise in yields.
Now, many are hoping that rate cuts are imminent. However, this may be premature, as the Fed is no longer forecasting a recession. If there is no recession, the Fed is unlikely to cut rates, as it has been reluctant to do so in the past.
The headline inflation rate of 3% is drawing a lot of attention, but the core rate is a better gauge, as it strips out the volatile food and energy components. This core rate has dropped only 110 bps in the last year, and currently sits at 4.8%.
Jim Bianco has a good way of explaining why this matters. He says that the Fed’s neutral rate is half a percent above inflation, so if the inflation rate is 3%, the neutral rate is 3.5%. The current rate is 200 bps above that, so the 10-year yield must be at 5% to be neutral. Right now, the 10-year yield is at 3.9%.
Wage pressure remains high and unemployment is at a half-century low. With the lagged effects of monetary policy, and the swiftness of this hiking cycle, caution is advised to crypto investors despite the recent optimism in the market.