Federal Reserve’s May Minutes Signal Tighter Policy
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The release of the Federal Reserve’s May 3-4 meeting minutes confirms, as expected, that the Federal Open Market Committee (FOMC) will continue with 50 basis point interest rate hikes for June and July. Due to the rapidly increasing inflation rate and consumer price index numbers from April, the FOMC is united in continuing its aggressive policies in an effort to prevent a recession.
Moving forward, the FOMC will be monitoring a few important factors; inflation, mortgage back securities (MBS) sales, and economic growth rates. As evidenced by the market contractions in stocks, bonds, and futures, bankers and traders are now following the movements of the FOMC with intense scrutiny, particularly the rate at which they will offload the nearly $9 trillion ledger. The plan, as outlined in the minutes, indicated a balance sheet runoff cap of $65 billion in Treasury securities and $30 billion in MBS per month.
So far, the market prices have accounted for a potential 2.5%-3% increase by the end of the year but the indications from the meeting alludes to rates potentially higher than expected. If so, the middle and lower working class will begin to feel the effects on everyday prices for goods, energy, and loans. While the FOMC remains hopeful that they can temper the increasing inflation, their stance points out that it will not be without significant economic strain in the year to come.
Fluctuations in the stock market seen as a result of the FOMC movements spells a similar theme for cryptocurrency, as both BTC and ETH move increasingly in tandem with traditional equities. BTC, in particular, has been tethered to tech stocks showing a 90-day correlation coefficient of 0.68 with the Nasdaq-100. Tightening of economic policy is empirically bearish for high-risk assets and emerging technology.
Cryptocurrencies may continue to see stagnant growth in the days to come, as indicated by BTC trading sideways this week. This should not suggest that the fate of crypto will continue to be determined by stocks, but it will take the time or significant factors to separate the two markets once again. If the government passes overdue legislation defining cryptocurrencies and establishing oversight, that could be the jolt needed to separate crypto from traditional equities once again.
Whether or not a recession occurs, interest rates are destined for an upward trend and will continue to squeeze small businesses, working classes, and higher-risk assets. The continued conflict in Russia and Ukraine coupled with lockdowns in China exacerbate the supply shock crisis for the rest of the world. With the global economy stressed on multiple levels, recovery will be arduous, making the decisions on behalf of central banks increasingly difficult. There are many convinced that the actions of the FOMC are too late, nevertheless, the minutes confirm that avoiding recession won’t be without difficulty and that before long, the pressure will reach every sector of the economy.