As the US Federal Reserve (Fed) prepares to announce its interest-rate decision on Wednesday, the question is not whether it will hike the benchmark borrowing cost by 25 basis points (bps), but whether this increase will mark the end of a tightening cycle that began 16 months ago and was partly responsible for last year’s crypto market crash. The Fed is expected to raise the rate to a 22-year high of 5.25%-5.5%, with Chairman Jerome Powell holding a press conference half an hour after the 18:00 UTC (14:00 ET) announcement. A recent Reuters survey of 106 economists showed most expect the hike to be the last one for a while. “Looking at the Fed’s Summary of Economic Projections (SEP) from June, the median forecast among Fed officials indicated two more 25 bp hikes would occur by year-end, but markets haven’t fully bought into this view,” said Matt Kunke, a research analyst at crypto trading firm and liquidity provider GSR. Bank of America expects the Fed to raise rates in September, and since the June’s Fed meeting stocks have surged and investors have trimmed expectations of more tightening. Bitcoin has rallied 16%, largely on the back of spot-ETF optimism and partly aided by the ‘goldilocks’ economic scenario.
However, some crypto observers suggest that the Fed may still raise rates beyond July, which could put downward pressure on risk assets, including cryptocurrencies. Dick Lo, the founder and CEO of quant-driven crypto trading firm TDX Strategies, said, “We will be watching the language in the FOMC statement and the subsequent Powell press conference, where a hawkish tone leaving the doors open to a further rate hike this year may put further downward pressure on markets.” David Lawant, head of research at institutional crypto derivatives platform FalconX, added, “I’m looking into what tone the Fed will set for the next meetings in September and beyond.” Tim Frost, CEO of digital wealth platform Yield App, warned it may be too early to celebrate the crypto bull market.
It’s possible that the Fed’s communiqué and Wall Street sentiment do not matter as much to bitcoin, as the cryptocurrency’s correlation to stocks has weakened in the past 90 days. However, correlations are backward-looking indicators and can change fast. Crypto traders may be better off paying attention to what the Fed says and how traditional markets react.