Fed Chair Powell Leaves Door to Further Rate Hikes Open – Here is How Crypto Markets Reacted

Speaking at an annual conference of central bankers at Jackson Hole, the Chairman of the US Federal Reserve Jerome Powell left the door open to the possibility of further interest rate hikes in the US, triggering some short-lived sell pressure in the crypto market.

Bitcoin (BTC) fell to new daily lows in the $25,800s from earlier session highs at $26,200 in response to Powell’s remarks, though was last trading closer to $26,000, with losses in the last 24 hours at a modest 0.5%.

Ether (ETH) is also down versus its pre-Powell speech levels, but at current levels around $1,650, the cryptocurrency is flat in the last 24 hours.

The picture amongst major altcoins was more mixed, with the likes of BNB (BNB) and XRP (XRP) flat, Polkadot (DOT) and Litecoin (LTC) slightly in the green and Cardano (ADA) and Solana (SOL) slightly in the red.

The move lower in crypto prices comes after US 2-year yields hit their highest level since early July near 5.10% – short-dated US yields are the most sensitive to changes in expectations regarding the Fed’s interest rate plans.

Higher yields on US government debt, which is considered a risk-free asset, encourage investors to sell their holdings of “riskier” assets, such as crypto.

Fed Prepared to Raise Rates Further If Needed

The Fed is prepared to lift interest rates further if needed to address inflation, Powell said at Jackson Hole, though he said the central bank would proceed cautiously.

In any case, the central bank will maintain its restrictive monetary policy stance until US inflation is sustainably slowing, he added.

The Fed lifted benchmark US interest rates to 5.25-5.50% in July, its highest levels in over two decades.

The central bank began raising interest rates aggressively in March 2022 after a surge in US inflation that began in mid-2021 proved larger and more durable than the Fed had been expecting.

After topping out above 9% YoY in mid-2022, the headline inflation rate as per the US Consumer Price Index has since fallen back to around 3%, though that is still above the Fed’s 2.0% target.

And given the ongoing strength of the US labor market and the broader economy, the Fed remains concerned that inflation may not fall back sustainably to 2.0% in the near term.

Markets Up Bets on More Fed Rate Hikes

Upside in US yields and (admittedly modest) downside in the crypto market reflect the fact that macro investors/traders have upwardly repricing their expectations for more US interest rate hikes in the coming months, and tempering bets for an interest rate cutting cycle to begin in 2024.

As per the CME’s Fed Watch Tool, the US interest rate futures market implied odds of another 25 bps rate hike in September remained unchanged at around 20%, but the odds of a rate hike of at least 25 bps in November rose about 10% to 60%.

Meanwhile, the money market-implied odds that a rate-cutting cycle will have started by next March fell to around 21%, down from close to 30% prior to Powell’s remarks.

Crypto Bearish?

Friday’s upwards revision to the market’s US interest rate expectations does not seem to have phased the crypto market too much – Bitcoin (BTC) and Ether (ETH) remain within recent intra-day ranges.

While the Fed’s aggressive rate hiking cycle that began in 2022 was a key driver of last year’s crypto bear market, it seems that the market has mostly now adjusted to the “new normal” of US interest rate being at higher levels, and remaining at higher levels for longer.

At least, that the takeaway from the crypto market’s lack of bearish reaction to the rising probability that the Fed hikes interest rates again.

Traders seem to be taking the view that, ok, maybe a little more tightening from the Fed is coming, but we are close to the point of maximum pain (i.e. peak interest rates).

With so many other themes on the crypto markets radar right now, such as expected spot Bitcoin ETF and Ether futures ETF application approvals and ongoing legal crypto battles (namely, the SEC versus Ripple and Grayscale), macro may continue to take a back seat when it comes to driving the price action.

One theme that should be on crypto traders’ radar right now is a judge’s decision on Grayscale’s lawsuit versus the SEC over their refusal to approve its spot Bitcoin ETF application in 2022, which is expected soon.

^{Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.}