Cryptocurrency value dropped to its lowest in three weeks Wednesday, following Federal Reserve Chairman Jerome Powell’s testimony to Congress that hinted at a potential increase in interest rates. CoinDesk data shows that trading hours have fallen to a three-week low, with Bitcoin dipping to $21,871 and Ether nearly testing $1,535.
The central bank is likely to raise rates higher than previously expected, in response to concerns that the process of pushing the inflation target down to 2% has been stalled. Since last year, the Fed has increased rates by 450 basis point (bps), which has had an impact on risk assets, including cryptocurrencies.
In response to Powell’s comments, traders adjusted their expectations for the terminal or peak rate to 5.65%, up from 5.47% earlier this week and 4.9% one month ago. This suggests that the Fed is likely to continue raising rates by at least 100 basis points before they call it quits.
A closer look at the Fed Funds futures reveals that traders are expecting a “higher for longer interest rates” approach by the Fed. October Futures are the terminal rate, which implies a maximum borrowing cost of 5.65%, up from 4.9% one month ago. Markets also see a 70% chance of the Fed raising rates by 50 basis points this month.
The yield on the 2-year Treasury is also rising, reaching its highest level since 2007 and potentially climbing further to 5.655 given the terminal rate pricing. Rising rates/yields can reduce the appeal of risk assets, and could make it more difficult for bitcoins to maintain current valuations.
However, skeptics don’t expect rising yields to lead to a large sell-off in risk assets. A macro trader and the author of the popular Substack-based newsletter, Fidenza Macro, believes that risk assets will trend higher once the market returns to a disinflation regime, though this could take a few months.
