Cryptos drop today as Powell signals upcoming 50bps rate hike

Cryptocurrencies and other risky assets are dropping this morning following hawkish remarks from the head of the United States central bank – the Federal Reserve – that hinted to policymakers possibly eyeing a 50 basis points rate hike during their next meeting.

The head of the Fed, Jerome Powell, made comments in regards to these upcoming changes in the country’s monetary policies at a seminar hosted by the International Monetary Fund (IMF) where Christine Lagarde, the head of the European Central Bank (ECB), is also scheduled to speak.

Powell Seems Resolved to Adopt a Tighter Policy

Powell stated that he thought it was “appropriate” for the bank to move “a little quickly” to contain the recent escalation in prices in the United States at a time when commodity prices – especially oil – are on the rise amid the Russia-Ukraine war.

If a 50 basis points hike is ultimately implemented, this would be the largest one-time adjustment in the Fed’s benchmark interest rate since 2000, back when the dot-com bubble burst.

“Fifty basis points will be on the table for the May meeting” Powell stated referring to the upcoming meeting of the Federal Open Market Committee (FOMC) scheduled to take place on the 3rd day of such month.

The price of major cryptocurrencies is declining against the US dollar this morning with Bitcoin (BTC) dropping as much as 6.5% at $ 39,757 per coin while Ethereum (ETH) is also down 5.7% at $ 2,969 per coin.

In addition to this interest rate hike, Powell also emphasized that the central bank may also take more aggressive steps to reduce its $ 9 trillion balance sheet.

Major stock market indexes are also down as market participants keep digesting the news. Risk appetite in the financial markets has been relatively subdued this year as the macroeconomic landscape is evolving negatively in a post-pandemic scenario while rising geopolitical tensions amid the invasion of Ukraine by Russia are also weighing on investors’ sentiment.

Inflation, a mixed catalyst for cryptos

Even though cryptocurrency advocates have always deemed inflation as the ultimate positive catalyst for the adoption of digital assets as potential stores of value, that theoretical assumption is being put to the test in recent months as the price of cryptos keeps declining despite the materialization of this scenario.

In March, annualized inflation in the United States ended at 8.5% as measured by the Consumer Price Index (CPI). This has been the highest annualized rate in the last 41 years and it has alarmed both policymakers and consumers.

Since the year started, the price of Bitcoin (BTC) – typically a barometer of the crypto market’s overall performance – has declined nearly 14% as the markets have adopted a risk-off attitude.

President Joe Biden has attributed these elevated inflation readings to the actions of Russia’s President Vladimir Putin, referring to his decision to invade Ukraine, and to COVID-prompted supply chain bottlenecks.

Regardless of the cause, cryptos have not shielded investors from a loss in the purchasing power of the dollar. In fact, they have done the opposite as their value has dropped in nominal terms at the same time that prices within the economy are surging.

One possible explanation for this counter-intuitive move is that market participants may have already priced in that policymakers will take the appropriate measures to deal with these elevated inflationary pressures.

This includes the implementation of multiple interest rate hikes this year – a move that has already been confirmed as possible by top officials from the Federal Reserve – along with a reduction of the bank’s balance sheet, which will result in a liquidity drain for the markets.

In this scenario, appetite for risky assets is set to decline and that could have a direct impact on the valuation of cryptos and other digital assets as investors could opt to park their money in more “traditional” corners of the market that may yield attractive returns in a scenario marked by higher floor rates.

Crypto assets are highly volatile unregulated assets. Your capital is at risk.

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Author: Alejandro Arrieche

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