Fed Meeting Notes Reflect Economic Uncertainty
Neither this post nor any other on cryptofal.com should be take as financial advice. It is not.
This is an excerpt written by Crista Yamasaki for our May Newsletter released on May 5th.
Since the Federal Open Market Committee (FOMC) at the Federal Reserve first began to signal an aggressive stance on rate hikes, the markets have reflected a shift in investor confidence and a movement away from higher-risk assets like cryptocurrency. The release of the FOMC notes from Tuesday and Wednesday’s meetings reveal what to expect from the Fed and their assessment of the health of the U.S. economy as they try to tackle the nearly $9 trillion balance sheet and an 8.5% inflation.
During a press conference given Wednesday, Chairman Powell announced that the FOMC unanimously decided on a half-point rate hike with further half-point hikes for June and July on the table. Traders hoping the recent market fluctuations might produce a dovish Fed were immediately disappointed however, Powell’s reassurance that the rumored three-quarter hike was unlikely led the stock and crypto markets to enjoy a momentary sigh of relief. Across both markets, immediate gains were posted signaling hope for a recovery. Unfortunately, the gains were lost the following day, with Bitcoin dropping 11%--its largest drop since January.
These contractions in the market and subsequent downturn reflect the mixed confidence in the ability of the Fed to prevent a recession. The growing concern of a recession weighs heavily and could, in part, be influencing market movements. When asked about a possible recession, Powell indicated that the Fed “expects growth to be solid this year” because based on labor demand, this is still a “strong economy” and strong labor market.
Typically, a recession would signal high unemployment, whereas today's labor market reflects the opposite with almost 2 to 1 job vacancies in the labor force. Unfortunately, a competitive labor market will also work towards increasing inflation as will the increasing threat of supply shock coming from overseas.
Though there are many factors that power the fluctuations in both stock and crypto markets, it is difficult to ignore the prevailing issues that plague the global economic system. Russia enters the third month of its war with Ukraine and the lockdown in China, namely the port of Shanghai, has begun to stress the chain of supply in the global economy.
Commodity prices and supply shock on grains and wheat threaten the Middle East and South Asia, whereas China deals with the absence of metals from Ukraine. Much of the world is dependent on Russia, the reality for Europe being a potential energy crisis due to the sanctions placed on Russian oil.
All of this culminates into the mentality that very few stores of value are safe or guaranteed. While the correlation coefficient between BTC and S&P 500 reached a 17-month high in March, it’s a possibility that may deviate should the aforementioned factors hold true. In spite of a hawkish Fed, supply-side shocks, international conflict, inflation, the threat of recession, and the pandemic, cryptocurrency has held relatively strong.
The continued adoption of crypto continues despite all the factors influencing the market today. More than anything, curiosity and low confidence in traditional institutions is what entices consumers towards crypto as a wild card asset, and is what continues to further its adoption by countries, governments, institutions, and businesses.
