Market Byte: Crypto and the End of Fed Tightening

Zach B&W
Zach Pandl
Last Update 09/19/2023
  • At tomorrow’s meeting, we expect that the Federal Reserve will signal either that it has finished raising rates or that it will be finished after one more increase in Q4. That guidance will likely drive crypto and traditional assets over the very short run.
  • For crypto, whether the Fed hikes one more time or not may be less important than the fact that the broader tightening cycle is coming to an end. Fed tightening has weighed on valuations, and its conclusion could help support an eventual recovery.


In the aftermath of COVID-19 shutdowns in 2020, the Federal Reserve committed to overstimulating the US economy–with hopes to avoid the sluggish recovery that followed the 2008-2009 financial crisis. It promised not to raise interest rates from zero until the labor market had reached maximum employment, inflation had reached its 2% target and was on track to exceed 2% for some time. The Fed began to change course around the middle of 2021, when it seemed to realize it was overdoing it. Since then the Fed has begun to wind down its extensive securities portfolio, and has delivered the largest and steepest funds rate increases in modern history (Exhibit 1)—a remarkably abrupt turn from policy easing to tightening. 


Exhibit 1: Near the end of largest and steepest rate hikes in recent history

The Fed’s policy pivots and resulting changes in market interest rates have had major implications for digital asset valuations. Bitcoin surged in late 2020 as real (inflation-adjusted) interest rates turned deeply negative, and then declined in 2022 as Fed rate hikes pushed real interest rates back up again (Exhibit 2). Bitcoin is an alternative non-sovereign money system and digital competitor to gold (as well as a key element in the public blockchain ecosystem with additional potential use cases). Falling real interest rates tend to result in currency depreciation against other fiat currencies and the price of gold. Likewise, rising real interest rates tend to result in currency appreciation against other fiat currencies and the price of gold. Bitcoin’s price has behaved largely as we would expect: rising during the Fed’s easing process and falling when the central bank began tightening. 


Exhibit 2: Bitcoin’s price has moved inversely with real interest rates


We may now be approaching the next stage in this process. We believe the FOMC (Federal Open Market Committee) is likely to keep rates on hold at tomorrow’s meeting. In its projections published at the conclusion of the meeting, we expect that it will either signal that it is done hiking rates or that markets should expect one more rate increase later this year. The last time it offered guidance on policy rates, in June 2023, most Fed officials expected to deliver one more rate increase beyond the current 5.25-5.50% range. Since that time, inflation data have been benign, but the labor market still looks solid, oil prices have moved up sharply, and financial conditions have not meaningfully tightened. Market pricing implies a meaningful probability that the committee will lean toward one more rate increase in November or December 2023. 


We believe tomorrow’s policy rate guidance will likely drive crypto and traditional assets over the very short term. But regardless whether rate hikes are done already or the Fed will signal one more, we are likely close to the end of the latest tightening cycle. After the funds rate peaked in the last five tightening cycles, real interest rates declined and equity market performance generally improved (Exhibits 3 & 4). A similar pattern would likely support digital asset valuations: crypto has been held back by the rise in real interest rates and correlated to the drawdown in technology stocks; Bitcoin’s price decline through 2022 closely tracked the drop in frontier technology equities, for example. Lower real rates and firmer equity markets should, in turn, support crypto prices. 


Exhibit 3: When the Fed stops hiking, real interest rates historically fall … 

Exhibit 4: … and equity returns improve

Naturally, there is no guarantee that this pattern will repeat itself. Although rate hikes are likely done or nearly finished, the Fed will likely continue to shrink its securities portfolio, which could put upward pressure on real interest rates. Moreover, equity markets have performed well in recent months, and could stumble if the economy slips into recession. A “soft landing” could see crypto rebound relatively quickly, but a “hard landing” might prolong the period of range-bound prices. 

Nonetheless, the possible end to the Fed’s policy rate increases should be considered an important moment for Bitcoin and other digital assets. The crypto ecosystem continues to evolve daily–with new applications, enhancements to existing protocols, and wider adoption–but token prices do not always track this progress. Over the last few years, valuations have been heavily influenced by the macroeconomics backdrop and swings in Fed monetary policy–from ultra-easy policy in 2020 to steep rate increases more recently. A possible end of the tightening process could remove a headwind to crypto valuations, and allow prices to more closely track the industry’s improving fundamentals.


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The Federal Reserve (“Fed”) is the central bank of the United States. Its Federal Open Markets Committee (FOMC), consisting of members of the Federal Reserve Board and voting members of the presidents of the regional banks in the Fed system, decides the nation’s monetary policy. Real interest rates refer to the rate of return on an investment after accounting for inflation in the price of goods over the same period. The S&P 500 Index (SPX) is a market-capitalization-weighted index that measures the performance of 500 of the largest publicly traded companies in the United States. You cannot directly invest in an index.

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Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. 

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There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.

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