January 26th, 2022
- During Wednesday’s (1/26) FOMC meeting, the US Federal Reserve stated that, going forward, the Federal Funds rate will be the primary policy instrument used to combat inflation.
- Essentially, this means that the Fed is passing the responsibility to stop inflation onto the bond market.
- Additionally, the Fed did not hike interest rates on the 26th, however, it still intends to hike rates within the near future.
- Most importantly for crypto, the Fed is still yet to stop quantitative easing (printing money).
FOMC Meeting Summary
The close of Wednesday’s FOMC meeting showed us that the US Federal Reserve is trying to ‘toe the line’ between being perceived as too hawkish or too dovish. Importantly, the Fed has decided to take a passive approach to combat inflation. The Fed is not yet ready to stop money printing, and its primary tool to nullify inflation going forward will be the Federal Funds rate.
Put simply, the Federal Funds rate is the overnight lending rate used between banks. Most often, when people mention ‘hiking or cutting interest rates’, they are referring to changes in the Federal Funds rate. The US Federal Reserve uses the Federal Funds rate as a signaling mechanism, used to represent where the Fed would like the bond market to set interest rates.
When the federal funds rate moves, this subsequently leads to changes in the bond markets – whose purpose is to figure out what to set interest rates for 2 year, 5 year, or 10 year bonds. This fluctuating dynamic is known as the ‘yield curve’.
Currently, US dollar inflation is at 7% while the federal funds rate is at 0 – 0.25%. Therefore, it makes sense that the Fed intends to raise interest rates.
The key takeaway from Wednesday’s FOMC meeting is that the Federal Reserve is passing the responsibility to stop inflation onto the bond market.
Additionally, the Federal Reserve mentioned its intention to reduce asset purchases “at some point.”
FOMC Analysis
After the close of Wednesday’s FOMC, the main question to ask is – why did the Fed pass the inflation problem onto the bond market? Possibly, this is due to major problems within China’s real estate market. The Fed may not want to act too hawkish, so as to prevent drastic economic damage overseas.
The next FOMC meeting will take place on March 16, 2022. There will be two CPI (Consumer Price Index) releases between now and then. These will be released on Feb 10th and March 10th.
The Fed is currently making a bet that upcoming inflation reports will be moderate. If the inflation numbers are bad, then the bond market will handle it. However, if the numbers are reasonable, then that leaves room for equities to return to stability and for crypto to smoke higher.
How Does This Affect Crypto?
Beyond all the specifics, what affects crypto the most is whether the Fed will continue quantitative easing (printing money). The severity of Covid plays a large role in this decision. Notably, in the FOMC meeting Jerome Powell mentioned Covid along with the possibility of tightening ‘sooner than expected’.
What we know for certain is that Fed money printing will continue until at least mid March (the date of the next FOMC meeting). Overall, this is bullish news for the crypto market.
In the immediate short term, potential upside or downside for crypto is contingent upon the Feb 10th CPI inflation report. Again, if this report is reasonable, then equities can be expected to stabilize and crypto can rebound. Alternatively, if the CPI reports high inflation, then the the market will continue within its bearish trend.
Until February’s CPI report, the crypto market is at the mercy of the bond market. To track this, it is best to look at the charts for 2yr, 5yr, and 10yr US government bonds.
Key Takeaways
- The Fed did not hike interest rates on the 26th, however it still intends to hike rates within the near future.
- The Fed has not stopped printing money yet.
- The Fed is making a bet that upcoming inflation reports will be moderate.
- If inflation reports are moderate, then equites can be expected to stabilize and crypto can rebound.
