The recent release of the minutes from this month’s FOMC meeting of US Federal Reserve policymakers showcased a divided stance on whether further interest rate hikes are necessary. As a result, cryptocurrency, forex, US equity, and US bond markets saw minimal reactions. Some Fed officials are leaning towards additional tightening, while others, including Fed Chair Jerome Powell, suggest a pause in interest rate hikes might be beneficial.
The US central bank previously raised interest rates by 25 bps to 5.0-5.25% after its 2-3rd May meeting. This marks the 10th consecutive rate hike in just 14 months, with the main aim being to curb an unexpectedly prolonged surge in US price pressures. However, this hawkish pivot has led to a bear market for equity and crypto markets in 2022.
The minutes indicate that if the economy continues to evolve according to current outlooks, further policy firming may not be essential. However, with some participants expecting slow progress in returning inflation to 2%, additional policy firming might be required in the future. The odds for another rate hike on the 14th June meeting currently sit at 30%, unchanged from one day ago.
Data will play a key role in determining whether the Fed hikes again or holds. Many policymakers are focusing on retaining “optionality,” meaning that they want the ability to respond to incoming data, such as inflation and job market results. Consequently, traders will closely monitor upcoming Core PCE inflation data for April, May ISM survey results, and the official May jobs report.
Major cryptocurrencies like Bitcoin (BTC) and Ether (ETH) are likely to perform better in an environment where Fed tightening bets are easing. Bitcoin is currently down over 15% versus its earlier yearly highs above $31,000, while Ether trades just under $1,800, down a similar margin from its highs in the mid-$2,100s.
A potential wildcard with significant implications is a possible US default if Congress is unable to reach a deal to raise the debt ceiling. Though most expect a last-minute deal, economists at JP Morgan estimate the odds of the US government running out of cash before a deal is done currently stand at 25% and rising.
A US government default could severely impact the government, economy, and global financial order, leading to structural increases in interest rates, a worsened credit crunch, and potential recession risks. Furthermore, this ordeal could weaken confidence in the US dollar and the fiat currency-based financial system. Such a situation could generate massive demand for hard-money alternatives like gold and Bitcoin.