Can the Fed’s decision lead to a short-term rally?

GB Market Commentary 21/09/2022

by Marcus Sotiriou

Volatility is scarce in the crypto market, with Bitcoin hovering around $19,000, but extreme volatility is due today. Many investors are currently sidelined, as they eagerly anticipate the news of the Federal Reserve (U.S. Central Bank) decision on the next rate hike. They will clarify how much they will raise rates by.

As mentioned previously, raising rates is negative for crypto because it means that it becomes more expensive to borrow because loan payments are larger and so it entices people to save more, which is what central banks want in order to clamp down on persistently high inflation.

The market has priced in an 84% chance of a 75 basis point rate hike and a 16% chance of a 25 basis point rate hike. This means that the market is anticipating a 75 basis point rate hike.

A 100 basis point rate hike is unexpected and could lead to more pain for global markets. If a 75 basis point rate hike is announced there will be no surprises, so it could lead to a short term rally as the news has been priced in. Any rally in the short term will be unwelcomed by the Federal Reserve though, as it means people feel more wealthy and more likely to spend, hence contributing to more inflation – something known as the wealth effect.

Despite the tumultuous market conditions traditional finance institutions continue to enter the space, as the Nasdaq, the second biggest American stock exchange by market cap, is launching a digital assets business that is targeted at institutional investors. This will likely aim to compete with companies such as Fidelity Digital Assets, Coinbase and Gemini, and is incredibly bullish for the whole space. This gives further indication of institutional interest in the crypto market for the next 5-10 years.