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Crypto Surges as Fed Recognizes Disinflation

Cryptocurrency prices edged higher on Wednesday in the wake of more candid remarks from Fed Chairman Jerome Powell, who was speaking as usual after a Fed-policy announcement press conference. risk assets, including sharesPowell acknowledged that the central bank has made progress in its fight against inflation and said that “the deflation process has begun”.

Powell’s comments came shortly after the Fed announced a widely expected 25 bps hike to the federal funds target range to 4.50-4.75%. Bitcoin The last trade was near $23,700, which is now up about 2.7% on the day and down about 4.0% from its previous post-Fed low of $22,700.

Ethereum The previous day was up an impressive 3.5% at $1,640. The world’s second largest cryptocurrency by market capitalization is now threatening an upside break of a short-term pennant structure that would open the door for a bullish move towards the $1,800 resistance area. Meanwhile, prefer major altcoins cardano, solana, polygon And polka dot All are up 4-8% compared to their pre-Fed policy announcement levels.

Powell missed an opportunity to send the market down

Powell had a chance to push back against the recent easing of financial conditions (i.e. the high in January in stocks and crypto and the fall in the US dollar and yields). However, he added that the Fed’s focus was on long-term economic trends, not short-term market moves.

Several strategists were warning ahead of today’s Fed meeting that Powell could look to harsher remarks to ease “animal spirits” in the market, based on the perception that the Fed does not seek premature easing of financial conditions. Make your task of getting inflation back to the 2.0% target more difficult.

As it happened, the harsh words designed to rouse the market weren’t there, so assets like crypto boomed. However, in its statement, the Fed said that ongoing rate hikes were still necessary and that “two” more hikes would be likely. This may be at odds with the base case of the market assuming that there will be only one more 25 bps rate hike (in March) before the hiking cycle ends.

Either way, crypto now appears to have the green light to rally in the short term. Short positions in the past few hours remain at risk in the wake of Wednesday’s post-Fed rally in the crypto space. data shows short-position liquidation ahead of the Fed meeting, suggesting that a short squeeze could continue to support the market.

But can crypto rally if the US is headed for a recession?

It was all smiles among crypto investors on Wednesday. But the post-Fed rally could soon turn volatile. Big tech giants like Meta Platforms, Amazon, Apple and Alphabet are reporting earnings in the next two days. And so far, fourth-quarter earnings for S&P 500 companies generally point to one thing — earnings deceleration.

This is because the US economy is increasingly stagnating, largely as a result of the backward effect of the Fed’s aggressive hiking cycle in 2022. The general consensus among macro analysts is that the US economy will enter a recession within the next few quarters. Popular macro analyst Alfonso Pecatillo recently outlined in an in-depth Twitter thread why he expects a recession in four to five months.

Essentially, leading economic indicators including Global Credit Impulse, the Conference Board Leading Index, the Housing Market and the Philly Fed New Order Index are all pointing in this direction. The US recession means that the earnings downturn is likely to get worse for corporate America.

There’s a risk that this prevents stocks from benefiting from any optimism about a less aggressive Fed. And crypto has generally been closely tied to stocks over the past few years. Thus the question for investors is whether cryptocurrencies can withstand a US recession, even if economic weakness forces the Fed to pivot harder dovish.

Looking at the experience of the last few years, the answer can be yes. The pandemic lockdowns of 2020 sent the US economy into a short but deep recession. After an initial selloff amid panic caused by the spread of Covid-19, crypto has emerged stronger than ever as the Fed slashed interest rates to zero and the US government launched an unprecedented fiscal stimulus.

Every cycle is different. The Fed is unlikely to cut rates to zero as quickly as 2020. And the US government doesn’t have the ability to push through 2020 and 2021 with the kind of stimulus. But easing financial conditions may well underpin crypto in 2023, even if the US recession means we won’t see a bull market as aggressive as in late 2020/2021.

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