The bitcoin price—after crashing through the first six months of the year as the Fed began to raise interest rates—has found a floor in July, climbing around 10% since the start of the month. Ethereum has meanwhile rocketed almost 50% as hype over its planned upgrade builds, helping other top ten cryptocurrencies BNB
Now, after leaks revealed a “major red flag” for bitcoin and crypto exchange Coinbase, the market is braced for the Fed to go “bigger and longer” in its battle to fight red-hot inflation as it accelerates the reduction of its $8.9 trillion balance sheet.
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The Federal Reserve’s Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday this week and is expected to raise interest rates by another 75 basis points, following in the footsteps of June’s rate hike.
Earlier this month, in the aftermath of June’s blistering 9.1% consumer price index (CPI) reading, traders had expected the Fed to raise rates by a whole one percentage point.
“Financial markets had begun to price in a one-percentage point interest rate increase at this meeting but Fed officials appear to have talked away that prospect,” Russ Mould, investment director at broker AJ Bell, wrote in emailed comments.
Markets are now pricing in a 70% likelihood of a 0.75% increase to 2.50% and a 30% chance of a full one-point hike, according to CME Fedwatch data. By the end of 2022 the market is putting a 90% probability on the Fed funds rate reaching at least 3.50% as the U.S. central bank fights to bring down inflation from its 40-year high of 9.1%.
“But all of this depends on, and even assumes, that inflation peaks very soon,” Greg McBride, chief financial analyst at Bankrate, told MarketWatch. “If not, all bets are off.”
A producer price index (PPI) reading of 11.3% this month, near the record 11.6% posted in March, “suggests there could yet be more pain to come,” according to Mould.
The Federal Reserve is also set to accelerate its so-called quantitative tightening plan that’s already reduced total Fed assets by $66 billion from its $9 trillion peak, increasing to $95 billion per month from September.
“Total Fed assets of $8.9 trillion still mean that the central bank’s balance sheet is 8% bigger than it was a year ago, 114% bigger than it was before the pandemic in February 2020 and nearly nine-times bigger than it was before the Great Financial Crisis of 2007-2009,” Mould added.
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Some market watchers and investors fear U.S. inflation is “more deeply entrenched” and will need a “bigger and longer” response from the Fed to drive it down.
“My own view is the Fed funds rate could exceed 4%,” Joseph Zidle, chief investment strategist in Blackstone’s private wealth solutions group, told Bloomberg. “I think they could go above 4.5%, maybe even closer to 5%.”
However, after a bruising few months for the stock market, bitcoin and crypto prices, some analysts are hoping softer language from the Fed this week could bring some welcome relief.
“If they come in with a 75-basis-point hike as we expect but soften the language about future hikes, it would be a huge boost to markets next week,” Luke Tilley, chief economist at Wilmington Trust, told Barrons.
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