Home > Blog > How will the Fed rate hike affect the crypto market?



Digital asset rates, like the stock market, react sensitively to regulatory decisions such as changes in the key rate. It is expected that due to record inflation in the United States on September 21, at the next meeting, the US Federal Reserve (Fed) will raise the key rate by 100 basis points (bp), which would be the biggest increase since the early 1990s.

The US Federal Reserve has repeatedly raised this indicator this year. So, in March, for the first time since 2018, the Fed raised the rate by 25 basis points (bp) to 0.25–0.5% per annum. Then, on May 4, the rate was raised immediately by 50 bps, and in mid–June the indicator was raised by 75 bps for the first time since 1994: the Federal Reserve increased the interest rate to 1.5-1.75% per annum, which was the most significant increase in the last 28 years. On July 27, the Fed raised the rate again — to 2.25–2.5%.

According to financial analysts, even taking into account the possible increase in September to 3.5%, the American regulator will not stop there. So, Bloomberg economists suggest that the Fed will eventually be forced to increase the indicator to 5%.

Experts explained to RBC-Crypto how a possible increase in interest rates at the next Fed meeting could affect the prices of cryptocurrencies, and what will happen to the digital asset market if the key rate rises to record values.

Global trends

Against the background of the general crisis in the global economy, a noticeable rate increase will have a very negative impact, first of all, on the stock market, says a senior analyst Bestchange.ru Nikita Zuborev. But the crypto market is also seriously connected by cash flows with the traditional financial system, so it will indirectly suffer from the Fed’s policy, the expert is sure. He suggested that in the event of a serious rate increase, new lows could be expected for all top tokens, up to a decrease in their rates by 30-40% from current levels.

However, the analyst noted that closer to the end of the global financial cycle, the correlation between the markets will decrease and the crypto market will begin to recover much earlier, as it has happened more than once. But if we consider global trends in the markets, this will most likely happen no earlier than mid-2023, Zuborev believes.

In addition to “cooling” the economy by raising the base interest rate, the Fed and the US government can at any time resume the practice of stimulating markets with “helicopter money” (when central banks print money to financially support the population), the expert believes. According to him, in such a situation, high-risk assets, including cryptocurrencies, can receive a significant inflow of capital, which will be the starting impulse for a trend reversal and the beginning of a bull market lasting 1.5-2 years.

“Sheer drop”

Bloomberg’s forecast looks more “hawkish” compared to what economists of investment banks and markets expect in general — the rate ceiling is around 4.5–4.75%, according to Chen Limin, financial director and head of the department of trading operations of the ICB Fund crypto fund. He noted that a more aggressive tightening of monetary policy will provoke an even stronger peak in the stock and cryptocurrency markets than what can be assumed in the baseline scenario.

The second quarter for bitcoin turned out to be the worst in the last 11 years, and the subsequent recovery in July-August was based on the feeling that against the background of signs of recession, the Fed would retreat and start lowering rates in the spring of 2023, the expert said. But he explained that the speech of the head of the Federal Reserve Jerome Powell in Jackson Hole showed the fallacy of such ideas.

The upcoming meeting on September 21 should finally debunk this myth — together with an increase in the key rate by 75-100 bp, the Fed will present an average forecast for 2023, which may indicate its increased level throughout the year, the expert suggested. He also noted that Jerome Powell can assume that in November-December the Fed may not be limited to a rise of 25 bps — the basic scenario for the markets.

“In this scenario, risky asset markets are waiting for a steep drop, which can be supported by triggering stop orders and margin calls,” the expert believes.

“Tone softening”

Only subsequent publications of macro statistics can change the situation if the data are much worse than forecasts, which will also be supported by a softening of the tone of the rhetoric of the Fed representatives, Limin suggested. He clarified that taking into account the speed of the impact of regulatory decisions on the economy, the development of events in a similar vein can be expected no earlier than November-December. Consequently, the stock and cryptocurrency markets, which continue to maintain a high correlation, will have to go through a new stage of “pain” ahead, the expert admitted.

Bitcoin is close to testing the minimum since the beginning of the year ($ 17.6 thousand), and in the next two days we can expect that the “bears” will bring the price to this milestone, Limin believes. According to him, the “bulls” can only be saved by the Fed’s decision to limit itself to an increase of 50 bps, Powell’s balanced rhetoric and a revision of the rate trajectory in accordance with market expectations. Otherwise, there will be a high probability of a breakdown of $ 17.6 thousand and the continuation of medium-term negative dynamics, the expert concluded.

Digital asset rates, like the stock market, react sensitively to regulatory decisions such as changes in the key rate. It is expected that due to record inflation in the United States on September 21, at the next meeting, the US Federal Reserve (Fed) will raise the key rate by 100 basis points (bp), which would be the biggest increase since the early 1990s.

The US Federal Reserve has repeatedly raised this indicator this year. So, in March, for the first time since 2018, the Fed raised the rate by 25 basis points (bp) to 0.25–0.5% per annum. Then, on May 4, the rate was raised immediately by 50 bps, and in mid–June the indicator was raised by 75 bps for the first time since 1994: the Federal Reserve increased the interest rate to 1.5-1.75% per annum, which was the most significant increase in the last 28 years. On July 27, the Fed raised the rate again — to 2.25–2.5%.

According to financial analysts, even taking into account the possible increase in September to 3.5%, the American regulator will not stop there. So, Bloomberg economists suggest that the Fed will eventually be forced to increase the indicator to 5%.

Experts explained to RBC-Crypto how a possible increase in interest rates at the next Fed meeting could affect the prices of cryptocurrencies, and what will happen to the digital asset market if the key rate rises to record values.

Global trends

Against the background of the general crisis in the global economy, a noticeable rate increase will have a very negative impact, first of all, on the stock market, says a senior analyst Bestchange.ru Nikita Zuborev. But the crypto market is also seriously connected by cash flows with the traditional financial system, so it will indirectly suffer from the Fed’s policy, the expert is sure. He suggested that in the event of a serious rate increase, new lows could be expected for all top tokens, up to a decrease in their rates by 30-40% from current levels.

However, the analyst noted that closer to the end of the global financial cycle, the correlation between the markets will decrease and the crypto market will begin to recover much earlier, as it has happened more than once. But if we consider global trends in the markets, this will most likely happen no earlier than mid-2023, Zuborev believes.

In addition to “cooling” the economy by raising the base interest rate, the Fed and the US government can at any time resume the practice of stimulating markets with “helicopter money” (when central banks print money to financially support the population), the expert believes. According to him, in such a situation, high-risk assets, including cryptocurrencies, can receive a significant inflow of capital, which will be the starting impulse for a trend reversal and the beginning of a bull market lasting 1.5-2 years.

“Sheer drop”

Bloomberg’s forecast looks more “hawkish” compared to what economists of investment banks and markets expect in general — the rate ceiling is around 4.5–4.75%, according to Chen Limin, financial director and head of the department of trading operations of the ICB Fund crypto fund. He noted that a more aggressive tightening of monetary policy will provoke an even stronger peak in the stock and cryptocurrency markets than what can be assumed in the baseline scenario.

The second quarter for bitcoin turned out to be the worst in the last 11 years, and the subsequent recovery in July-August was based on the feeling that against the background of signs of recession, the Fed would retreat and start lowering rates in the spring of 2023, the expert said. But he explained that the speech of the head of the Federal Reserve Jerome Powell in Jackson Hole showed the fallacy of such ideas.

The upcoming meeting on September 21 should finally debunk this myth — together with an increase in the key rate by 75-100 bp, the Fed will present an average forecast for 2023, which may indicate its increased level throughout the year, the expert suggested. He also noted that Jerome Powell can assume that in November-December the Fed may not be limited to a rise of 25 bps — the basic scenario for the markets.

“In this scenario, risky asset markets are waiting for a steep drop, which can be supported by triggering stop orders and margin calls,” the expert believes.

“Tone softening”

Only subsequent publications of macro statistics can change the situation if the data are much worse than forecasts, which will also be supported by a softening of the tone of the rhetoric of the Fed representatives, Limin suggested. He clarified that taking into account the speed of the impact of regulatory decisions on the economy, the development of events in a similar vein can be expected no earlier than November-December. Consequently, the stock and cryptocurrency markets, which continue to maintain a high correlation, will have to go through a new stage of “pain” ahead, the expert admitted.

Bitcoin is close to testing the minimum since the beginning of the year ($ 17.6 thousand), and in the next two days we can expect that the “bears” will bring the price to this milestone, Limin believes. According to him, the “bulls” can only be saved by the Fed’s decision to limit itself to an increase of 50 bps, Powell’s balanced rhetoric and a revision of the rate trajectory in accordance with market expectations. Otherwise, there will be a high probability of a breakdown of $ 17.6 thousand and the continuation of medium-term negative dynamics, the expert concluded.