The U.S. Federal Reserve (Fed) will likely raise the benchmark borrowing cost by 75 basis points (0.75%) on Wednesday in a continued effort to drain liquidity to tamp down inflation. Crypto traders are split on how bitcoin (BTC) would react to the rate hike.
Griffin Ardern, a volatility trader at crypto asset management firm Blofin, foresees a bitcoin price drop after the Fed lifts rates by 75 basis points (bps) to the 2.25%-2.5% window.
"Considering that the overall risk level of the crypto market has not returned to a reasonable level, it is very likely that the BTC price will drop by more than 10% after the Fed rate hike," Ardern said.
The Fed's liquidity-sucking measures, such as rate hikes and balance sheet runoffs, have roiled asset markets in the past few months. Bitcoin has declined by over 50% since the central bank kicked off the tightening cycle in March.
"Bitcoin and the broader crypto market may see another relief rally following the 75 basis point rate hike after which we expect markets to trade sideways, while ether (ETH) may outperform in anticipation of the merge," according to Dick Lo, founder and CEO of quant-driven trading firm TDX Strategie.
Perhaps traditional and crypto markets have priced in the impending 75 basis points hike, with Fed officials hinting at such a move in recent weeks.
Bitcoin has dropped by 7% in the week leading up to Wednesday's Fed event. "We are seeing participants taking a risk-off approach ahead of the FOMC decision as expected," Lo responded when asked about the pre-Fed flows in the crypto market.
At press time, the Fed fund futures, derivatives based on the benchmark interest rate, put the likelihood of a 75 bps move at 75%, alongside a 25% probability of a 100 bps hike.
Trader and analyst Alex Kruger said the crypto market could see a small rally following a 75 bps rate rise but warned of a decline should the central bank surprise with a 100 basis point move. However, Fed officials had pushed back against a full percentage point hike earlier this month.
Beyond rate hikes
The focus will be on how worried policymakers are about unemployment risks and the looming recession in Europe.
The market has convinced itself that inflation has peaked and the Fed will go for slower rate hikes after July, eventually cutting rate next year. That seems to be evident from the 28 bps drop in the 10-year Treasury yield in the past seven days. At press time, the yield stood near 2.8%.
Risk assets, like bitcoin, could rally if the Fed's policy statement or chairman Jerome Powell sound increasingly concerned about recession risks, bolstering market expectations for a policy pivot (from tightening to easing) in 2023.
However, observers expect the Fed to retain its single-minded focus on controlling inflation while downplaying recession fears.
"There is no doubt that Powell will pivot, but the pivot will not be this year, at least until November, and there will be no significant reduction in rate hikes (like 25 bps). The reason is that the Biden administration needs the Fed to join them in expressing its determination and confidence to fight inflation to win the midterm elections in November," Blofin's Ardern told CoinDesk.
According to Jon Turek, author of the Cheap Convexity blog, the Fed is likely to stick to June script.
"We are in this time inconsistency state where the Fed is reacting to June CPI and the market is trading the European recession. The Fed will side with June CPI and I think to more of a degree than risk assets are suggesting right now," Turek said in a Fed preview published Tuesday.
