What the FOMC Meeting Means for the Crypto Markets

The Federal Open Market Committee (FOMC) oversees the US open market operations and meets eight times in a year to discuss and implement changes to the  U.S monetary policy. During such meetings, markets often tend to be volatile due to changes in economic variables like short-term interest rates, foreign exchange rates, employment output, long-term interest rates etc.

US Interest Rates in last 10 years

As the next FOMC meeting takes place on September 21, 2022, the markets are expecting a hike of  0.75% to 1% in interest rates.

Given that the federal rates fund target for the end of the year is predicted to exceed 4%, the general opinion is that an increase of 0.75% in interest rates would be neutral for markets, this scenario has already been priced as the most likely one. However, an increase of 1% in interest rates, which is the second-most likely scenario, would have a severe impact on equities, and by extension, crypto assets as well, due to their high correlation and increased hawkish sentiment in uncertain times.

What does federal fund rate mean? 

It is the rate at which commercial banks in the US lend to each other overnight

But Is Bitcoin a hedge against inflation?

As the dollar continues its meteoric climb, posting fresh yearly highs versus the British Pound, Euro, Yen and other currencies year to date, it proves to impact most foreign currencies and risk-on assets as investors turn to the dollar as the reserve currency during uncertain times.

As one can see from the above chart, the notion that Bitcoin is a hedge against inflation, still holds true over the long-term. However, it is currently overpowered by the strengthening of the Dollar Strength Index (DXY) because it is primarily a hedge against currency devaluation.

BTC is a hedge against currency devaluation as evidenced by the strong correlation with DXY in the past decade

Bitcoin has historically protected holders against currency devaluation in the past as observed by the rallies that occurred in response to the weakening dollar. Typical DXY bottoms have coincided with BTC rallies and vice versa as can be seen in the chart above.We expect this trend to hold true in the future as well.

Despite the fact that Gold and Silver prices have also dropped significantly over the past few weeks, their safety as a store of value has not been questioned. The notion that they are still valuable assets or commodities holds true. 

On-chain analytics and other logarithmic models indicate that Bitcoin is currently oversold. Experts believe that even though the macroeconomic outlook seems negative, inflation is close to peaking out thereby prompting potentially less stringent monetary policies. This will encourage institutional adoption of cryptos, which in turn will drive the next bull cycle.