Crypto Surges as Fed Recognizes Disinflation – But Can Crypto Deal With a US Recession?
Cryptocurrency prices lurched higher on Wednesday in wake of more dovish than expected remarks from Fed Chairman Jerome Powell, who was speaking as usual in the post-Fed policy announcement press conference. Risk assets, including stocks, surged as Powell acknowledged that the central bank has made progress in its fight against inflation and said that the “disinflation process has started”.
Powell’s comment came shortly after the Fed announced a widely expected 25 bps hike to the Federal Funds target range to 4.50-4.75%. Bitcoin was last trading close to $23,700s, now up around 2.7% on the day and up closer to 4.0% versus its prior post-Fed lows in the $22,700s.
Ethereum was last up an even more impressive over 3.5% on the day in the $1,640s. 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 to a quick run higher towards resistance in the $1,800 area. Meanwhile, major altcoins like Cardano, Solana, Polygon and Polkadot are all up 4-8% versus their pre-Fed policy announcement levels.
Powell Passes Up Chance to Send Markets Lower
Powell had the chance to push back against the recent easing in financial conditions (i.e. the January move higher in stocks and crypto and lower in the US dollar and yields). However, he said that the Fed’s focus was on longer-term economic trends, not short-term market moves.
Many strategists had been warning prior to today’s Fed meeting that Powell might look to ramp up the harsh commentary in order to dampen “animal spirits” in the market, based on the assumption that the Fed doesn’t want a premature easing of financial conditions to make their job of getting inflation back to the 2.0% target more difficult.
As it happened, harsh words designed to trip up the market were not there, hence the bounce in assets like crypto. However, in its statement, the Fed said that ongoing rate increases were still needed and a “couple” more hikes would likely be warranted. That might be at odds with the market’s base case assumes that there will be just one more 25 bps rate hike (in March) before the hiking cycle is over.
Either way, crypto now seemingly has the green light to rally in the short term. Short positions thus remain at risk, having been obliterated over the last few hours in wake of Wednesday’s post-Fed rally across the crypto space. Coinglass.com data demonstrates short-position liquidations spiking in wake 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 Recession?
It’s all smiles amongst crypto investors on Wednesday. But the post-Fed rally could quickly come unstuck. Big tech giants including the likes of Meta Platforms, Amazon, Apple and Alphabet are all reporting earnings over the next two days. And Q4 earnings out so far for S&P 500 companies have generally pointed towards the same thing – an earnings recession.
That’s because the US economy is rapidly stagnating, largely as a result of the lagged impact of the Fed’s aggressive hiking cycle of 2022. The consensus amongst macro analysts is that the US economy will have fallen into recession sometime within the next few quarters. Popular macro analyst Alfonso Peccatiello recently outlined in an in-depth Twitter thread as to why he expects a recession in four to five months.
In 4-5 months, I expect the US to be in a recession.— Alf (@MacroAlf) January 28, 2023
Essentially, lead economic indicators including the Global Credit Impulse, the Conference Board’s Leading Index, the Housing Market and Philly Fed New Orders Index are all pointing in this direction. A US recession means that the earnings recession for corporate America is likely to get worse.
There is a risk that this prevents stocks from benefitting from any optimism about a less hawkish Fed. And crypto has generally been closely correlated to stocks in the last few years. The question for investors is thus whether crypto can weather a US recession, even if economic weakness does force the Fed into a harder dovish pivot.
Looking at the experience of the last few years, the answer might be yes. The pandemic lockdowns of 2020 sent the US economy into a short but deep recession. After an initial sell-off amid the panic caused by the spread of Covid-19, crypto came back stronger than ever as the Fed axed interest rates to zero and the US government began unprecedented fiscal stimulus.
Every cycle is different. The Fed is unlikely to axe rates to zero as fast as in 2020. And the US government doesn’t have the ability to press ahead with the kind of stimulus it did in 2020 and 2021. But an easing of financial conditions in 2023 could well underpin crypto, even if a US recession means that we don’t get as aggressive of a bull market as in late 2020/2021.