Can The Federal Reserve Counterattack Stop Crypto Bull Run?

The crypto industry may be facing a major setback as the Federal Reserve (FED) appears to be losing control of the markets. This new status quo could lead to even more hawkish measures impacting the traditional and cryptocurrency markets. 

A report released on January 29 by Michael J. Kramer – founder of Mott Capital, suggests that the FED needs to “push back against the market before it’s too late.” Since the December Federal Open Market Committee (FOMC) meeting, financial conditions have eased dramatically. 

This easing of financial conditions has led to a rise in commodity prices, a drop in mortgage rates, a weakening dollar, and a rally in stocks and significant crypto assets, including Bitcoin, Ethereum, and others. 

According to Kramer, the February Federal Open Market Committee (FOMC) meeting will be crucial because the FED will need to roll back the current easing of financial conditions. In addition, the Mott Capital founder believes that these current market conditions are at the same level as when the FED began raising interest rates.

For Kramer, pushing back at this point maybe even more complex and trickier than when Fed Chair Jerome Powell gave his Jackson Hole speech. The financial institution has the challenge of restoring price stability by “softening” labor conditions. 

As a result, the Fed has been hiking interest rates. Their objective is to bring down inflation, leading them to use “forceful tools to bring supply and demand into a better balance.” 

Furthermore, according to Kramer’s report, investors know the FED is closer to the end of its hiking cycle than the beginning. The market also expects inflation to continue its downward trend. Thus, any aggressive measure by the financial institution could surprise the legacy and crypto market, causing more significant than expected losses. 

In his analysis, Michael J. Kramer says the FED has two options: raise rates by 50 basis points (bps), which could be a big surprise for the markets, or signal that financial conditions have eased too much, which could prolong the rate tightening cycle.

What Cards Does The FED Has Left Under The Sleeve

The FED’s options are limited at this point. Kramer claims the market does not believe the FED when it wants monetary policy to be sufficiently restrictive and is willing to endure the current market conditions to kill the inflationary impulses that still exist.  

For Kramer, the FED can go against the collective belief that it will only raise rates by 25 basis points and instead raise rates by 50 basis points. Powell could also deliver a more vital message than he did at Jackson Hole last year. 

Otherwise, the FED may need to raise the issue of possibly increasing the pace of quantitative tightening and balance sheet unwinding. In short, Kramer believes that anything other than the above options would suggest that the FED is comfortable with the current easing of financial conditions and is willing to let the market take control and drive monetary policy.

How Will The Crypto Market React?

The crypto industry has great expectations of the Federal Market Committee meeting this week and Powell’s speech. Digital assets are facing major resistance lines after the volatility spikes since the beginning of 2023. 

It seems like a race against time and government action to see how investors and prices react to potentially more hawkish measures. The crypto market’s capitalization has increased, and the tightening measures may result in another crash for cryptocurrencies.

Crypto Bitcoin
BTC moving sideways on the daily chart. Source: BTCUSDT Tradingview

The vast majority of cryptocurrencies follow the price action of Bitcoin (BTC), and since the weekend, Bitcoin has suffered a slight correction. As of press time, Bitcoin has failed to gain higher territory, falling 1.6% in the last 24 hours, auctioning at $23,140, an 1.9% gain in the last seven days.

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