How Will the Hawkish Fed Impact Crypto Markets in the Second Half of 2024?

The Fed has recently released its interest rate decision, leaving the federal funds rate unchanged at 5.25 - 5.55%.

This time, the publication of the interest rate decision was accompanied by the summary of economic projections. The Fed did not change the GDP and unemployment rate projections compared to the March meeting.

However, the central bank raised forecasts for PCE and Core PCE, which means that the Fed expects higher inflation in 2024. As a reminder, the Fed targets PCE inflation rather than the inflation rate, which gets more publicity.

Importantly, the projected federal funds rate for 2024 was raised from 4.6% in March, which implied three 25 bps cuts, to 5.1% (just one rate cut). This is a major shift in the Fed’s economic projections, which shows that the central bank plans to be significantly more hawkish than previously expected.

Inflation remains stubborn, while the economic growth and the labor market stay strong. Thus, the Fed is forced to keep rates at high levels to cool the economy and reduce price pressure.

Interestingly, markets do not believe that the Fed will limit itself to just one rate cut in 2024. FedWatch Tool indicates that traders expect two rate cuts by the end of the year. It should be noted that there are multiple federal funds rate scenarios for 2024. Some traders are even ready to bet on four rate cuts by the end of the year, while others believe that the interest rate will remain unchanged.

The key question is how the Fed policy outlook will impact crypto markets. In the first half of this year, crypto markets were not sensitive to interest rate and Fed policy outlook fluctuations. The presence (or absence) of internal drivers served as the key catalyst for crypto. These drivers included the launch of spot ETFs, regulatory changes, the emergence of popular coins, etc.

Tight monetary policy may dry up liquidity in financial markets. However, it does not mean that the potential impact will be the same in different markets. Judging by the performance of U.S. equity indices, high interest rates have no impact on stock investors’ risk appetite. However, the situation looks different in crypto markets, where traders have become cautious in the absence of powerful internal drivers.

Currently, crypto markets are in a consolidation phase. Therefore, lower liquidity in global markets may put some pressure on crypto. Speculative coins could suffer the most as such instruments are usually more sensitive to the changes in the interest rate outlook.

The crypto market is structured in such a way that long-term holders are mostly interested in BTC and ETH. Other coins are typically used for shorter-term speculation. As soon as the flow of new money stops, such coins start to lose ground. Meanwhile, the impact of Fed policy on BTC and ETH would be less pronounced. Traders should also note that the emergence of new drivers could push crypto to new highs regardless of the Fed policy outlook. Such drivers have been proven to be more powerful than any changes in interest rates.