Crypto traders might be excused for hoping Fed officials at their annual meeting in Jackson Hole, Wyoming, say something encouraging about the months ahead.
According to a recent report, Bitcoin (BTC) is down 53% from New Year’s Eve. Ether (ETH) has fallen 54%, while its price has risen in the last month amid enthusiasm about the impending Merge protocol change.
Crypto’s carnage is largely due to the Fed’s campaign to tamp down inflation by rising interest rates. Bitcoin fell 11% Friday after minutes from the Federal Open Market Committee’s (FOMC) July meeting showed central bankers weren’t as enthusiastic about inflation as first anticipated by investors — a hint interest rates may have to climb even more.
More hawkish comments from Jackson Hole, where the meeting meets Aug. 25-27, might send crypto assets down. Crypto and traditional investors believe the Fed’s tightening program will cause a recession. U.S. Treasury bonds, a key market, seem to support this concern. Short-term bond yields currently exceed longer-term ones, a yield curve inversion that often precedes economic contraction.
Central bankers and most economists insist the U.S. economy is not in a recession and that a gentle landing — reducing inflation without precipitating a recession – is possible.
In recent weeks, this mismatch has shook bitcoin and stock markets. Both climbed after Jerome Powell’s dovish July speech. Following hawkish FOMC minutes, prices fell.
Powell and his colleagues must provide market clarity at Jackson Hole.
David Wessel, a Brookings Institution senior scholar and former Wall Street Journal economics editor, stated, “I’m looking forward to seeing if Powell can correct the market.” “When the Fed’s public projection contradicts the market, he realizes this is his chance to direct markets.”
Traders expect the Fed to drop rates next year to undo part of its tightening, but central bankers have indicated such expectations are “premature.”
This reveals a contradiction between market expectations and Fed pronouncements, and traders may lack confidence in the Fed.
“If the Fed continues to diminish the balance sheet, they’re serious about inflation,” said Odeon Capital Group’s Dick Bove. If they don’t accomplish that, their words are meaningless.
The Fed committed to decrease its $9 trillion balance sheet in June, but only began selling Treasury bonds last week. The central bank should sell Treasurys and MBS. The latter bothers Bove.
“I believe [the Fed] will cut Treasurys, but I’m concerned of what they may do with mortgage-backed securities,” he said, referring to the last great recession.
New home sales declined dramatically in July and beyond expectations, a survey revealed Friday, reflecting the Fed’s rate hikes on the housing market. Some economists believe that inventory will continue rising, leading to further decreases in property prices.
This forecast might be favorable for crypto by pressing the Fed to be more dovish, resulting in a weaker U.S. dollar and a higher crypto market, said Genesis Trading’s Joshua Lim. Digital Currency Group owns Genesis and CoinDesk.
Wessel thinks the market isn’t “dumb” and knows the Fed will lower MBS, but the question is whether they’ll do more.
“Short-term rates will be emphasized,” he stated.
Powell knows traders would seek unambiguous direction on inflation and recession fears, but markets won’t likely learn what FOMC members plan to do in September.
“Everyone will be seeking for hints, so whatever adverb he uses will make some think 50 or 75 basis points. Wessels thinks he’ll dodge hints. “They’re trying to wean the markets off forward guidance,” where everything must be apparent before FOMC meetings.
Bove agrees and says the Fed will double down on its stance that inflation can only be contained by raising rates.
“They keep their tongues quiet and do what’s needed,” he stated.
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