Some analysts believe the Fed’s tightening cycle will be far shorter than projected, giving bitcoin bulls confidence.
After Russian President Vladimir Putin’s war on Ukraine brought bitcoin to one-month lows under $35,000 and the S&P 500 futures down 730 points, actor and director Joel Heyman tweeted early Thursday, “The Federal Reserve Chairman Putin announces cancellation of March rate hike and extension to QE.”
Heyman’s sarcastic tweet referring to Putin as the chairman of the US Federal Reserve reflects current crypto market sentiment, with traders hoping that the US central bank, led by Jerome Powell, will abandon plans to unwind liquidity-boosting stimulus measures due to geopolitical uncertainty and asset market instability. That might be good news for bitcoin, which has lost 40% in the last three months, primarily due to fears of a Fed rate hike.
Experts, on the other hand, do not expect the Fed to do a total 180-degree shift. “It’s difficult to see the Fed fully abandoning its March hike plans,” said Matthew Dibb, COO and co-founder of Stack Funds. “There is no doubt that a rise in commodity prices will result in inflationary pressures. Russia and Ukraine continue to be major exporters of precious metals and agricultural products.”
Indeed, the Fed is caught in a Catch-22 predicament, since global uncertainty threatens financial market stability and the economy on the one hand, and the economy on the other. On the other hand, it has the potential to exacerbate already high inflationary pressures around the world.
According to data given by chart site TradingView, Brent oil has crossed the $100 level for the first time since 2014. Conditions are in place, according to Goldman Sachs, for a commodities mega surge.
Alex Kruger, a trader and analyst, stated, “This is the worst-case situation, a tremendous tail risk.” “Crude and food grain prices are likely to remain elevated for a longer period of time.”
Kruger, on the other hand, stated that crude oil and food grains do not represent core inflation, and that the Fed may ignore a price increase in these commodities. In the next months, it will be interesting to see if the central bank turns a blind eye to the volatile components of inflation. “It’s tough to predict the Fed’s reaction right now,” Kruger said, “but we’ll get a sense of it until officials start talking about it.” Core inflation is often regarded as the most accurate and dependable indication of demand-side pressures.
According to Stack Funds’ Dibb, the question now isn’t whether the Fed will raise or not, but rather ‘how much’ will be hiked.
Cycle of shallow tightening
Observers predict a short tightening cycle with fewer rate hikes than previously anticipated.
“The planned rate hikes will still take place… most likely two or three hikes. However, the market’s forecast of six to nine raises has little chance of materialising “In a Telegram chat with, Jeff Dorman, CIO of digital asset management firm Arca, said.
Markets were pricing in a six-quarter-percentage-point interest rate boost in 2022 as of Wednesday. According to Fed funds futures data, rates traders appear to be pricing in the sixth rate hike as a result of Putin’s declaration of war on Ukraine. Furthermore, a rate drop in 2024 is already priced into the market.
Once the first knee-jerk reaction to the Russia-Ukraine war wears off, expectations for a brief tightening cycle and a shift in focus from inflation to geopolitics should provide some respite to bitcoin and other asset prices.
“The market is already pricing in rate reduction in 2024,” Dorman joked, implying that rate hikes will have no effect because the market is already pricing in a reversal.
Russia-Ukraine hostilities, according to Ben Lilly, an economist at Jarvis Labs, are a pleasant diversion for the Fed.
“From day to day, fewer eyes are focused on inflation issues. In addition, the overall unpredictability of geopolitics may limit expenditure to some extent “Lilly mentioned it in a Telegram conversation. “The disagreement may potentially provide the Fed with a cause for rising inflation.”
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.