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Crypto Markets Join Risk-On Rally on Mixed FED and FOMC Signals 


A day before, cryptocurrencies surged despite a hawkish FED and FOMC statement. The US Federal Reserve Chairman Jerome Powell’s comments and the central bank’s 0.75 percentage point rate increase failed to drive an uptrend in the US dollar. Therefore, the leading cryptocurrency, Bitcoin, increased by 7.9% to $22,911, while the second leading crypto coin, Ether, increased by 10.58% to $1,624, the biggest percentage increase for both assets since June 19.

Let’s dig deeper to understand what the hawkish FOMC and the Fed rate hike mean for the crypto market.

Key Takeaways from the FOMC Statement and Jerome Powell Press Conference

  • The FOMC voted yesterday to raise all policy rates by another “unusually large” 75 basis points, the second in a row and the most hawkish move since 1994, without anyone contrary opinions, and even Esther George, who had disagreed the last time, was on board. 
  • The Federal Open Market Committee’s most recent monetary policy decision moves the Fed Funds Rate from 2.25% to 2.5%. 
  • For the second month in a row, the Federal Reserve hiked interest rates by three-quarters of a percentage point to temper inflation, which has reached a four-decade high. 
  • The bold move that pursues a parallel increase in June could hold markets, especially cryptocurrencies like Bitcoin (BTC), under pressure. 
  • The Fed has hiked interest rates for the fourth time in a year. Whereas the Fed also hikes the federal funds rate. It’s a rate at which commercial banks borrow and lend excess reserves to one another overnight. Now it ranges from 2.25% to 2.5%.

The Federal Reserve Balance Sheet

In June, the Federal Reserve began shrinking the $8.5 trillion balance sheet to reach its pre-recession level of approximately $4 trillion. The pace of decline will accelerate in September, with a projected monthly roll-off of $95 billion.

The Fed funds rate will likely remain the Fed’s primary tool for quantitative tightening, with central bankers expecting to raise interest rates to a range of 3.25% to 3.5% by the end of the year. It will be a non-conventional rapid pace of monetary tightening, given that the rate was near zero only four months ago.

For now, traders will scrutinize the gross domestic product (GDP) report from the US Bureau of Economic Analysis (BEA), due today, Thursday. The US GDDP figures might indicate that the US economy slowed in the second quarter, indicating the country is in a recession.

Dollar Weakens as Traders Buy the Rumors and Sell the News

You must wonder why the dollar got weaker despite the rate hike decision. Well, there are two reasons. 

Jerome Powell’s Remarks

The US Federal Reserve chairman Jerome Powell predicted weaker economic indicators in the coming days. It is obvious because borrowing costs (debt financing) will rise as interest rates rise. However, it may eventually impact the manufacturing and service sectors, as high borrowing costs will cause them to produce less. 

This starts a slow growth cycle, fewer new jobs, higher unemployment rates, and, ultimately, less spending. A decrease in spending will result in a decline in demand, an expansion in supply, and, eventually, a drop in prices. So, the drop in goods and service prices will lower inflation.

Buy the Rumor and Sell the Fact 

The dollar was getting stronger ahead of the interest rate decision amid rate hike sentiments. Most of the interest rate hike was already factored in, which means traders started buying US dollars on speculation that a Fed rate hike would make the dollar strong. So that’s what we call “buying the rumors.”

Later, when the actual decision was released, which was exactly what investors expected (a 0.75% hike), traders began to take profits. It’s called selling the fact. As a result, the dollar price began to fall, causing an uptrend in dollar-denominated pairs such as BTC/USD, ETH/USD, etc.  

When will the next FOMC meeting be held?

The FOMC meets eight times a year, with the next scheduled for September 21, 2022. So let’s keep an eye on it because, as you know, it has a significant impact on crypto trading.


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