Considering the current deteriorating inflation situation, the Fed seems to have no choice but to raise interest rates further and push up the risk-free rate by continuing to raise interest rates. In the resolution of the Fed’s meeting in June, the Fed has decided to raise interest rates by 75 basis points, and the possibility of raising interest rates by 75 basis points in July has risen to more than 60%; in September and November, they may raise interest rates by 50 basis points respectively. . Judging from Powell’s attitude, the Fed seems to have decided to sacrifice some economic growth and employment in exchange for a certain reduction in inflation. There is no doubt that this will worsen the already stretched liquidity in the crypto market.
For the crypto market, the continued downturn in forward expectations is even more deadly. Affected by the sell-off, the forward contango rate of mainstream crypto assets has been significantly lower than the risk-free rate of return in the traditional market, which has made the accelerated withdrawal of liquidity; there is no better way.
It doesn’t look like liquidity is coming back anytime soon. However, from a macro perspective, changes in U.S. bond yields and the U.S. mid-term elections may lead to a turnaround in the performance of the crypto asset market.
The performance of U.S. bond yields is one of the signals of a turnaround in the performance of crypto assets. The 2-year U.S. Treasury yield has been high due to the Fed’s hawkishness this year, and the decision at Thursday’s FOMC meeting is an important factor in the future performance of the 2-year U.S. Treasury yield. Once the 2-year-10-year U.S. Treasury yields show a steady inversion, a recession will appear and continue. Under the circumstance that raising interest rates has proved difficult to control inflation, the Fed may adjust the plan to solve the inflation problem from other perspectives such as the supply chain.
In fact, some relevant signals have already been revealed in the content of the Fed’s June FOMC meeting. On the one hand, the Fed raised its inflation forecast and unemployment rate forecast to 5.2% again this year, and lowered its economic growth forecast for this year. On the other hand, the Fed’s latest dot plot shows that interest rates will remain high in 2023 and gradually decline from 2024. However, with the current economic conditions not strong enough to withstand such a prolonged recession, the timing of the start of lowering interest rates may be earlier than expected in the dot plot.
So, when will this happen? The U.S. midterm elections in November 2022 could be a key juncture. If inflation is still out of control at this time, voters may question the economic performance of the Biden administration, which is undoubtedly something they do not want to see. At this time, the recession caused by the increase in interest rates may be close to the limit that the people can bear. Consumer confidence was already below levels in May before and after the 2008 economic crisis, and further rate hikes are only likely to cause more negative impacts.
In addition, the Fed has also partially achieved its goals: the ACWI index, which reflects the level of liquidity in global capital markets, shows that as of mid-June, liquidity has shrunk to the level of late 2020, with excess currency during the epidemic and liquidity overflowing everywhere. basically recovered. The Fed only needs to wait for the supply chain to recover and inflation to naturally fall before declaring that inflation “has returned to normal levels under policy control.”
Therefore, the December Fed meeting will be an important node for liquidity to return or not. It is worth noting that in the crypto market, the implied volatility of BTC forward calls significantly outperformed puts , and the volatility surface began to slope in the direction of higher prices; this phenomenon did not appear in May. Changes in the volatility surface of forward BTC options suggest that some investors expect the Federal Reserve to ease monetary policy from December, and the crypto market may usher in a return of liquidity from the end of the year.
At the June FOMC meeting on Thursday, the rate hike may exceed expectations, and the market is racing to digest the Fed’s more aggressive tightening policy. The crypto market will still face significant selling pressure given the risk exposure from the rate hike and the upcoming semi-annual derivatives delivery, and in the near term, safe-haven strategies such as risk-reversal portfolios will remain a priority for investors best choice.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/blofin-an-analysis-of-the-crypto-market-trend-in-december-or-a-turning-point-after-the-feds-sharp-interest-rate-hike/
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