Powell raises rates by 75 basis points, but Nasdaq and Bitcoin are surging.
What exactly is going on?
While I don’t agree with the market narrative unfolding here, let me try to explain why we are witnessing such a rebound.
Despite publicly acknowledging that economic growth is softening, the Fed has unanimously decided to raise rates by 75 basis points — all because of inflation, inflation and inflation. But the market finally started to bounce back only when Powell went on to say the following:
“Our current level is broadly in line with our estimate of the neutral rate, and after our rate hike cycle has been brought forward to the present, we will be more data-dependent going forward.”
Let’s take a look at why this is so relevant to the rally.
The neutral rate is the current rate at which the economy reaches its potential – not too hot or too cold. With this 75 basis point rate hike, the Fed has just hit its neutral rate forecast – and from now on, they are no longer overheating the economy.
But it also means that any rate hikes from here will put the Fed in a positive restrictive territory. The bond market knows that every time the Fed imposes restrictions, they break something, so Powell was asked a few very important questions:
How is the bond market priced? (cut by more than 70 basis points in 2023)
How are the financial conditions? (Bonds and stocks rebound, financial conditions are easier)
What about forward guidance?
What’s with the rebound?
It all stems from the very strong view the bond market has built on inflation over the past few months: It’s going to come down, and it’s going to be very fast. Between Jul-23 and Jul-24, CPI was priced at around 2.9% = PCE ~ 2.5%, basically hitting the target.
Who would outperform in these market conditions?
Nasdaq and cryptocurrencies. If the Fed no longer automatically enforces tightening of financial conditions, real yields will actually start falling again.
Valuation-intensive and risk-sentiment-driven asset classes outperform when real yields fall. This is because the marginal returns of owning cash dollars become less attractive and there is more incentive to chase risk assets: stock indices and BTC.
Do I think there is still room for this rally?
I can reasonably explain the post-FOMC uptick, but without forward guidance, a very, very volatile Fed is in front of us. A little hawk speaks and it disappears. You have to factor in some additional risk premium here, not a reduction!
Finally, what does the bond market reveal?
Between now and December, the bond market has some speculation on the size of the rate hike:
September 50 basis points
November 25 basis points
December 25 basis points
50 basis points in 2023
Of course, Fed hawks could push that number even higher.
But it also means a steeper growth curve going forward, as long-term growth prospects are not wiped out by an overly aggressive Fed. In terms of portfolio, the FOMC didn’t really change my assessment this time around, so my long-term portfolio is:
Go long bonds over 10 years
Massive dollar cash flow allocation
Positions in speculative risk assets are kept to a minimum.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-did-the-crypto-market-skyrocket-after-raising-interest-rates-by-75-basis-points/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.