Will the monetary policy decisions announced by the Fed on Wednesday have an impact on crypto markets?
The first thing to be said is that the markets were already expecting changes to monetary policy, and since the decisions announced by the Fed are in line with expectations, the markets were not shaken.
Generally speaking, what causes the most uncertainty, and thus the most volatility, is unexpected news, i.e. scenarios for which investors have not adequately prepared.
Since many had already prepared themselves for such decisions, uncertainty did not increase and little volatility was seen.
The Fed’s long-term decisions
However, if these changes did not have a significant impact in the short term, they could do so in the medium or long term.
The fact is that the decisions announced on Wednesday, while in line with market expectations, mark a change of course in the US central bank’s monetary policy.
After the March 2020 financial market meltdown due to the pandemic, the Fed initiated a period of strong expansionary policy by creating and issuing huge volumes of dollars in the markets.
On Wednesday it actually announced that this phase is coming to an end, as it doubled the volume of tapering from the current 15 billion to 30 billion per month.
Tapering refers to the reduction of stimulus in the form of money created out of thin air and distributed in the financial markets.
With the new pace of stimulus reduction, stimulus will be completely exhausted in March, effectively ending the current expansionary phase.
Moreover, with inflation at 6.8%, the Fed has announced three interest rate hikes in 2022, after the end of tapering, and none in December 2021.
The first consequence of these decisions is that nothing changes until the end of the year. However, from January onwards things will start to change, and by the end of 2022, they will have definitely changed.
Thus in the medium term, it is hard to imagine that these decisions will not have an impact on financial markets. In particular, tapering will greatly reduce the monetary stimulus towards financial markets, perhaps ending the bull run that began in April 2020.
Taking the S&P 500 and Nasdaq indices of the US stock markets as an example, cumulative growth since the peak in February 2020 has been 38% and 63% respectively, with a series of all-time highs broken both during 2020 and especially during 2021.
This growth phase, most likely due to the Fed’s expansionary monetary policy, may be set to end in the coming months.
What will happen to the crypto market
The same reasoning applies to the crypto markets, albeit to a much greater extent in percentage terms.
The price of Bitcoin in the same period increased by 343%, while the total market capitalization of cryptocurrencies rose from around 300 billion to 2.3 trillion today, peaking at over 3 trillion in early November this year.
The question now is: if the financial markets are short of the capital injected by the Fed, where will more capital come from to justify a further rise in prices?