Cryptocurrency Prices Forecast Ahead of the Fed Decision

Cryptocurrency prices have been in a tight range in the past few weeks. Most coins, including Bitcoin and XRP are all hovering near their lowest level in two years because of the recent collapse of FTX. Another reason for the underperformance is the Federal Reserve, which has already hiked rates by 400 basis points.

Fed interest rates and crypto

The Federal Reserve is the most important institution in the financial market. Unlike other institutions, only the Fed has the mandate to print the US dollar, the most used currency around the world. It is also the Fed that is given powers to set interest rates.

Therefore, actions by the Fed tend to have implications for all financial assets, including cryptocurrencies. When it lowers interest rates, as it happened during the Covid-19 pandemic, investors tend to embrace a risk-on sentiment. 

As a result, they move on to invest in risky assets like stocks and cryptocurrencies. The vice versa is also true. When interest rates rise, risk assets decline as investors take their funds to safe havens like bonds.

All this explains why stocks and cryptocurrencies have collapsed this year. Cryptocurrency prices have dropped by more than 60% this year while the Dow Jones and Nasdaq 100 have slipped by more than 15%.

In a bid to fight soaring inflation, the Fed has hiked interest rates by 400 basis points. It has also moved to tighten by lowering its total balance sheet through the quantitative tightening policy

Fed meeting next

The next key catalyst for cryptocurrency prices will be the upcoming Fed meeting scheduled for Wednesday next week.

Economists expect that the Fed will continue hiking rates since inflation remains at an elevated level. Precisely, they believe that the Fed will hike by 0.50% after raising rates by 75 basis points in the past four meetings. 

Therefore, the headline interest rate hike will not have an impact on cryptocurrency prices since it has already been priced in by the market. The key catalyst for crypto prices will be what the Fed will signal.

Some analysts expect that the bank will signal that it will maintain high rates in 2023. Others believe that it will move them above the key psychological level at 5%. A more hawkish Fed will likely bring crypto prices much lower.

The Fed meeting comes at a time when inflation is easing and the labor market remains tight. Inflation is expected to end the year at about 6.5% while the unemployment rate remains at 3.7%. Still, some analysts expect that unemployment rate will rise to 5% in 2023.