The crypto industry may be facing a major setback as the Federal Reserve (FED) appears to be losing control of the market. This new status quo could lead to more hawkish measures affecting both traditional and cryptocurrency markets.
A report released on January 29 by Michael J. Kramer – the founder of Mott Capital, suggests that the Fed needs to “push back the market before it’s too late.” Since the December Federal Open Market Committee (FOMC) meeting, financial conditions have weakened significantly.
This easing of financial conditions has led to a rise in commodity prices, a drop in mortgage rates, a weakening dollar, and a rally in stocks and significant crypto assets, including Bitcoin, Ethereum, and others.
According to Kramer, the February meeting of the Federal Open Market Committee (FOMC) will be important because the Fed will have to reverse the current financial situation. In addition, the founder of Mott Capital believes that the current market conditions are at the same level when the Fed started raising interest rates.
For Kramer, the retreat at this point may be more complex and complicated than when Fed Chairman Jerome Powell presented it Jackson Hole speech. Financial institutions have the challenge of restoring price stability by “softening” labor conditions.
As a result, the Fed has raised interest rates. Their goal is to reduce inflation, leading them to use “powerful tools to bring supply and demand into better balance.”
Furthermore, according to Kramer’s report, investors know that the Fed is closer to the end of the hiking cycle than the beginning. Markets also expect inflation to continue to decline. Thus, any aggressive move by financial institutions can surprise the legacy and the crypto market, causing more significant losses than expected.
In his analysis, Michael J. Kramer said the Fed has two options: raise rates by 50 basis points (bps), which could be a big shock to the market, or signal that financial conditions have weakened significantly, which could raise rates. tightening cycle.
What Cards The Fed Has Left Up Its Sleeve
The FED’s options are limited at this point. Kramer claims that the market distrusts the FED when it wants monetary policy to be restrictive enough and is willing to hold on to current market conditions to kill any remaining inflationary impulses.
For Kramer, the Fed could go against the collective belief that it would only raise rates by 25 basis points and instead raise rates by 50 basis points. Powell may also deliver a more important message than he did in Jackson Hole last year.
If not, the FED may have to raise the issue of increasing the pace of quantitative tightening and unwinding the balance sheet. In short, Kramer believes that anything other than the above options will suggest that the FED is comfortable with easing the current financial situation and is willing to let the market take control and drive monetary policy.
How is the Crypto Market Reacting?
The crypto industry has high expectations from this week’s Federal Market Committee meeting and Powell’s speech. The digital asset is facing a major resistance line after a spike in volatility since the start of 2023.
It seems like a race against time and government action to see how investors and prices react to more hawkish measures. The capitalization of the crypto market has increased, and the tightening measures may cause another disaster for cryptocurrencies.
The majority of cryptocurrencies follow the price action of Bitcoin (BTC), and since the weekend, Bitcoin has undergone a slight correction. At press time, Bitcoin has failed to gain higher territory, down 1.6% in the last 24 hours, trading at $23,140, a gain of 1.9% in the last seven days.