Are Cryptos In Danger From The FED?

Are Cryptos in danger from the FED? The FED's policy to curb inflation is likely to cost the stock market dearly, but also the crypto market.

The key role of the FED

The FED is the Federal Reserve of the United States. It is the central bank of the world's largest economy . It is she who deals with the monetary policy of the country. As such, one of its main missions is to control inflation . It is also responsible for promoting full employment or even offering moderate interest rates over time.

The United States, like the rest of the world, is experiencing an impressive price hike . Inflation exceeds 8% and it does not seem able to slow down. Also, the FED has therefore decided to increase its interest rates to limit this price increase. The Fed's objective is normally to limit inflation to just 2%.

During the year 2022, the FED was optimistic regarding the financial markets, including the equity market. It prepared market participants in advance for its announcements in accordance with forward guidance.

This process aims to provide indications on the future direction of monetary policy. This strategy must have a positive impact on markets and consumers by facilitating forecasts of the future of the economy. This method is now a thing of the past according to Jerome Powell, Chairman of the US Federal Reserve.

A new fall for the stock market?

Some observers believe that the FED and its more aggressive policy will lead to a sustained decline in the equity market. Brian Overby, equity market strategist at Ally, writes in a note:

"Clearly the Fed wants to see tighter financial conditions, which includes lower stock prices."

The equity market is already in trouble with a decline of nearly 19% on the S&P500 since the start of the year or nearly 15% on the Dow Jones. If the latter were to fall even more severely, there is no doubt that the crypto market would suffer.

The SP 500 down sharply since the start of 2022 (source: Tradingview.com)

The correlation between these two markets remains very strong . Just look at the recent announcements of interest rate hikes and their impact on the stock market as well as on Bitcoin.

Bitcoin is down nearly 73% since its ATH in November 2021. The entire market is suffering from degraded macroeconomic conditions but also from repeated hacks and bankruptcies in the crypto sector.

A risky strategy?

The decline in the equity market pushed by the FED is a risky policy . Jim Bianco, president of Bianco Research, a market analysis firm, says:

"The Fed wants to create a reverse wealth effect and cause people who own assets to rethink some of their investments and perhaps slow demand. It is a dangerous strategy. By wanting the market to fall, care must be taken not to scare away all investors, as this could cause an even more serious crisis."

US GDP contracted for two consecutive quarters , pushing the country into recession, according to the scientific definition of the term. However, for many observers the US economy remains solid and could digest future rate hikes from the FED. However, it will be necessary to observe the reaction of the markets to these new increases in the weeks and months to come.

The next announcement will be at the September 20 FOMC . Until then, new key indicators such as the CPI (Consumer Price Index) will be announced and will give a view of the state of the American economy.
For the time being, the unemployment rate is also relatively low. 

In the event of a recession and massive layoffs, this could change. Therefore, it is possible that this could influence the policy of the FED in terms of rate hikes. It is therefore difficult to find a balance for the body in charge of US monetary policy!