Any correlation between crypto price action and the FOMC rate schedules? Sort of, kind of…
With the crypto market having a sigh of relief in January with a +43% bump of the total crypto market cap since the end of November 2022, many analysts are looking towards the relatively bearish macro economic situation for a respite. In between war, rampant inflation, rising cost of living, supply chain inefficiencies, tensions between China and Taiwan and mass firings from the tech sector, it seems that disposable income can’t catch a well deserved break. As with every major central bank decision, investors in both crypto and TradFi alike are waiting for a bullish sign from high above that the peak of this market cycle is still a ways ahead. Nothing more true than that that today’s (February 2nd 2023) FOMC rate schedule
Why are rate schedules important?
As a very brief reminder, the Federal Open Market Committee (FOMC) is the policy-making body of the Federal Reserve System, responsible for setting monetary policy in the United States. The decisions of the FOMC can have a significant impact on the financial markets, including the stock market and the US dollar. One of the primary ways that the FOMC affects the stock market is through its management of interest rates. The FOMC can raise or lower interest rates, which can have a direct impact on the cost of borrowing for individuals and businesses. When interest rates are low, it is cheaper for individuals and businesses to borrow money, which can lead to increased spending and investment, and can be a positive driver for the stock market.
In addition to its impact on interest rates, the FOMC's decisions can also impact the value of the US dollar. A strong US dollar can make foreign goods and services more expensive, which can reduce consumer spending and hurt the stock market. Historically, this has also led to investments in what are considered “safe haven” investments, such as Gold. Conversely, a weak US dollar can make foreign goods and services cheaper, which can increase consumer spending and support the stock market.
The FOMC's decisions can also impact investor sentiment and confidence. When the FOMC indicates a strong commitment to maintaining low interest rates and a supportive monetary policy, it can create a more positive environment for the stock market. Conversely, when the FOMC indicates that it may raise interest rates in the future, it can create uncertainty and instability in the stock market.
What does this have to do with crypto?
The relationship between the FOMC and cryptocurrency prices is less clear. Cryptocurrency markets are influenced by a wide range of factors, including investor sentiment, regulatory developments, and technological advancements.
Source: CryptoSlate.com
That being said, there have been instances where the actions of the FOMC have had indirect effects on cryptocurrency prices. For example, changes in monetary policy or interest rates can impact the value of the US dollar, which is the primary currency used to purchase most cryptocurrencies. In these cases, the relationship between the FOMC and cryptocurrency prices is more indirect and complex.
Throughout its (comparatively) short history, BTC for example, has had quite a strong correlation to Gold. Since February 2022, the price of Bitcoin and gold have moved with an 83% correlation. Specifically for today’s rate hike, if BTC moves as together with Gold, we could be in for quite a bullish movement. However, the markets can stay irrational longer that traders can stay solvent.
Overall, while the FOMC's decisions may have some impact on cryptocurrency prices, it is not a direct or reliable predictor of cryptocurrency market activity. Cryptocurrency markets are driven by a range of complex and dynamic factors, and it is important for investors to consider a wide range of information when making investment decisions. Most importantly, as crypto becomes more mainstream, it is subjected to the same overall market rationality than stocks or commodities.