- Interest rates remained unchanged on Wednesday, but are set to stay higher for longer after the Fed updated its projections for next year.
- The revisions were “significant and unusually large,” said Mohamed El-Erian.
Happy Thursday!
The US Federal Reserve decided to pause interest rate increases on Wednesday, while policymaker’s at the central bank opted to revise their outlook for the next two years. Equity markets reacted and traded down while the the 30-year Treasury bond yield rose to its highest level since 2011.
Here’s what it all means for crypto and risk assets.
‘Hawkish pause’
The Fed left interest rates at the target range between 5.25% and 5.50% yesterday, but its outlook has changed drastically.
The revisions to the bank’s outlook on rates were “significant and unusually large,” said Mohamed El-Erian, president of Queen’s College Oxford and chief economic advisor at PIMCO’s parent company Allianz.
El-Erian said this would likely lead markets and analysts to view its announcement as a “hawkish pause.”
Equity markets appear to be digesting the Fed’s revisions. The S&P 500 and the Nasdaq 100 futures were both lower today, down 0.9% and 1.3%, respectively.
The major US indices are down in line with European stocks, where the Stoxx 600 fell 1.3%. Asian markets closed in the red, the Nikkei 225 fell 1.3%.
Crypto markets are no different as Bitcoin is once again trading below $27,000, down 1.5% in the past day. Bitcoin’s status as a risk asset means that higher interest rates dampen investors appetite to invest in it, and the broader crypto market.
Volatility in Bitcoin and equities is down over the past few weeks, and this could be about to change. Coinbase research said ahead of time that changes to projections would likely be due to August’s higher-than-expected inflation data.
Scrutiny of this may “add to volatility more broadly in the next two weeks,” David Duong, head of institutional research at the crypto exchange said.
The VIX, a measure of volatility in the S&P 500 has been trading at its longest consecutive streak below 19 since 2020, crypto market maker QCP Capital said this week.
Bitcoin similarly reached new lows and this has often preceded massive spikes in volatility in the past. The last time the S&P 500 broke out of a similarly low period of volatility was in 2020 due to the Covid crash.
The looming potential of a US government shutdown could also impact Bitcoin’s price going forward, QCP Capital said.
“This time we doubt the Fed would act to suppress volatility,” the market maker said in a note this week, it expects equities to continue to trade down in such a scenario, taking Bitcoin with it — at least until the Fed acts.
Crypto market movers
- Bitcoin fell 1.5% to about $26,700. Bankrupt crypto exchange Mt. Gox announced a delay to repayments, with the deadline pushed out by a year to October 2024. This delays the potential release of around $4.3 billion worth of Bitcoin that investors lost access to in 2014.
- Ethereum dropped below $1,600, down over 2%.
- Altcoins experienced sharper sell-offs as low liquidity conditions exacerbated price moves. Solana’s SOL and Binance-affiliated BNB both lost over 2.5%.
- Toncoin fell 7%. The small-cap cryptocurrency has tripled in size since July but its daily trading volumes are still low, around $45 to $55 million a day.
What we’re reading
- Will Binance’s fleeing execs become witnesses against the crypto exchange? — DL News
- R3 hit with new layoffs: CEO talks CBDC ‘fear-mongering’ and slams DeFi — DL News
- DeFi players lambaste report that market is riddled with $2bn in wash trades — DL News
Adam Morgan McCarthy is DL News’ London-based Markets Correspondent. Got a tip? Reach out at adam@dlnews.com.