Crypto Surges as Fed Recognizes Disinflation – But Can Crypto Deal With a US Recession?

Cryptocurrency prices lurched higher on Wednesday in wake of more dovish than expected remarks from Fed Chairman Jerome Powell, who was speaking as usual in the post-Fed policy announcement press conference. Risk assets, including stocks, surged as Powell acknowledged that the central bank has made progress in its fight against inflation and said that the “disinflation process has started”.

Powells comment came shortly after the Fed announced a widely expected 25 bps hike to the Federal Funds target range to 4.50-4.75%. Bitcoin was last trading close to $23,700s, now up around 2.7% on the day and up closer to 4.0% versus its prior post-Fed lows in the $22,700s. Ethereum was last up an even more impressive over 3.5% on the day in the $1,640s.

The worlds second-largest cryptocurrency by market capitalization is now threatening an upside break of a short-term pennant structure that would open the door to a quick run higher towards resistance in the $1,800 area. Meanwhile, major altcoins like Cardano, Solana, Polygon and Polkadot are all up 4-8% versus their pre-Fed policy announcement levels.

Powell Passes Up Chance to Send Markets Lower

Powell had the chance to push back against the recent easing in financial conditions (i.e. the January move higher in stocks and crypto and lower in the US dollar and yields). However, he said that the Feds focus was on longer-term economic trends, not short-term market moves. Many strategists had been warning prior to todays Fed meeting that Powell might look to ramp up the harsh commentary in order to dampen “animal spirits” in the market, based on the assumption that the Fed doesnt want a premature easing of financial conditions to make their job of getting inflation back to the 2.0% target more difficult.

As it happened, harsh words designed to trip up the market were not there, hence the bounce in assets like crypto. However, in its statement, the Fed said that ongoing rate increases were still needed and a “couple” more hikes would likely be warranted. That might be at odds with the markets base case assumes that there will be just one more 25 bps rate hike (in March) before the hiking cycle is over.

Either way, crypto now seemingly has the green light to rally in the short term. Short positions like this are still at risk as they have disappeared in the last few hours after Wednesday’s rally after the Fed shut down in the crypto space. Data from suggests sell-offs surged after the Fed meeting, suggesting that selling pressure may continue to support markets.

But if the US is heading into a recession, can cryptocurrencies rally?

All crypto investors are smiling on Wednesday. But the Fed’s rally could quickly cool off. Major tech giants including Meta Platforms, Amazon, Apple and Alphabet report earnings over the next two days. And the S&P 500 companies’ fourth-quarter earnings reports largely pointed to the same thing: earnings downturn.

This is mainly because the US economy is rapidly slowing down due to the lagging impact of the Fed’s aggressive 2022 boost cycle. Macro analysts agree that the US economy will enter a recession in the next few days. soldier. Popular macro analyst Alfonso Peccatiello recently tweeted why he expects a downturn in 4-5 months. In fact, key economic indicators such as the Global Credit Impulse, the Conference Board’s Leading Investment Index, the housing market, and the Philadelphia Fed’s New Orders Index are pointing in that direction. A slowdown in the US economy means that US companies’ earnings slump is likely to get worse.

This risks stocks not taking advantage of optimism about the Fed’s less hawkish stance. And over the past few years, cryptocurrencies in general have been closely tied to stocks. So the question for investors is whether cryptocurrencies can survive a US recession, even if the weaker economy forces the Fed to take a stronger dovish role. Looking at the experiences of the past few years, the answer may be yes. The pandemic plunged the US economy into a brief but deep recession in 2020. After an initial sell-off amid the panic caused by the spread of Covid-19, cryptocurrencies are stronger than ever as the Fed cut interest rates to zero and the US government launched unprecedented fiscal stimulus.

Each cycle is different. The Fed will not cut rates to zero as quickly as in 2020. And there is no way the U.S. government will push for stimulus like it did in 2020 and 2021. However, easing of financial conditions in 2023 could support cryptocurrencies very well, even if the U.S. recession does not suffer from an aggressive bull market like the end of 2020/2021.

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