FOMC, Inflation and Crypto: Deciphering what the Fed’s latest rate hike could mean for cryptos

In the recently concluded FOMC or the Federal Open Market Committee meeting that happened on 14 December, 2022 – a unanimous decision to raise interest rates by 50 basis points or about 0.5% – pretty much in line with what was expected. However the Federal Reserve Chairman, Jerome Powell, clearly stated his hawkish stance even as of now, saying there was “more work to do”.

In line with the hawkish stance, Powell was very clear through his speech, repeating multiple times that “it will take substantially more evidence” to gain confidence of the fact that inflation is on a sustained downtrend and would eventually reach the Fed’s slated target of 2%. However, with interest rates between 4.25-4.5% as of writing, it was pretty clear that a clear 100 bps jump from current levels was a definite thumbs up from all the members of the committee.

Additional read: What the FOMC Meeting Means for the Crypto Markets

Source: tradingeconomics.com

Soon after this, the Bank of England also hiked its own bank interest rates by an identical 50 basis points to 3.5% in their own attempt to contain the widespread inflation which had touched a scalding 11.1% back in October 2022. This is down from the 0.75% hike last month, however it also conveyed its strong hawkish stance on the issue and stated that further tightening is very well in the works.

Now let’s understand crypto’s situation in this scenario. Between 2020 to end of 2021, cryptos saw one of the biggest bull runs in its history, in pure dollar terms as overall crypto market capitalization rallied from sub trillion dollar levels to almost $3 trillion at the peak of the bull run in November 2021.

Also read: Third Consecutive Hike in Fed Interest Rates

But since then, the overall markets have been correcting as the impact of the Covid-19 pandemic began to subside and all major economies began the interest rate hike exercises to contain the inflation rates, and this has hit cryptos the hardest of all. In this round of aggressive quantitative tightening – assets that benefited from the ultra low interest rates during the Covid-19 global lockdown – ranging from high growth stocks and non cash-flow generating assets like cryptos – have been hit the hardest while adjusting to the reality of higher interest rates in the market.

Total Crypto Market Cap | Source: Tradingview

However, one particular thing to be noted is while, all through the first part of the year of 2022 – the overall crypto market was hit hard by the rising interest rates to contain the raging inflation. However, the last three rounds of FOMC meetings and the subsequent interest rate hikes have not been able to put a dent on the crypto market at large, as depicted on the chart above.

The crash that we can observe right after the November FOMC meeting was not a result of the meeting announcement itself but rather was a result of the fallout from the FTX collapse.

Additional read: FTX Collapse Explained!

Hence, with that in mind – one can assume that further interest rate hikes have already been factored into the prices of cryptos in general and hence the gradual hikes have not dented the overall crypto market cap too much. Hence we might be approaching a sort of bottoming out of the crypto market. A strong sustenance here would serve as a critical support region as and when the crypto market recovers in the future.

So, to conclude – further rate hikes from all major economies are definitely on the way – especially from the US and the UK along with India too. Inflation rates are still staggeringly high all across the world and interest rate hike is the only way to to contain the spread. But if all things stay under control, and there’s no other FTX-level catastrophes in the near future, we could see a strong, broad base recovery in cryptos as the quantitative tightening ultimately begins to ease in the future.