Cryptocurrencies, blockchain, NFT and new trends

What the FOMC? The Fed, interest rates, dot plots & what it all means for crypto

Markets • March 21, 2023, 4:25PM EDT | Shutterstock

Quick Take

  • The U.S. Federal Reserve’s latest interest rate decision is slated for Wednesday at 2 p.m. EDT.
  • Analysis using Fed Funds futures pricing suggests a 25-basis point increase is most likely, but major banks disagree.
  • The FOMC’s dot plot should hold insight for market analysts looking to discern what direction the policy committee will take this year.

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Is the U.S. Federal Reserve ready to slam the brakes on its rate hike agenda? With less than 24 hours to go, no one’s sure. 

Just two weeks ago, it seemed likely the Fed might increase rates by 50 basis points on Wednesday. Fed Chair Jerome Powell told Congress the central bank wasn’t afraid to increase the pace of hikes if needed. Then the second biggest U.S. banking failure ever happened, and now the landscape seems entirely different.  

Here’s what Wednesday’s decision means for crypto, why the dot plot is so important and where the Fed might go this year. 

The dot plot 

The Federal Open Market Committee is the central bank’s policy-setting committee and overseen by Powell. It’s made up of 12 rotating members including seven from the Board of Governors, the president of the Federal Reserve Bank of New York, and four members from the 11 other Reserve Bank presidents.

One of the committee’s most watched charts is the dot plot, which summarizes where these 12 members see the Fed Funds rate going. It’s released quarterly.

IDX Digital Assets CIO and founder Ben McMillan told The Block that the dot plot is likely to drop from the current end-of-year forecast of 5.4%. The current rate is 4.5%-4.75%.

Word on the street

Goldman Sachs expects the FOMC will pause hikes on Wednesday. Despite an aggressive response to “shore up the financial systems,” markets aren’t convinced this will be enough, analysts led by Jan Hatzius wrote. 

While the central bank has been raising rates to tame inflation, Goldman thinks it looks “less urgent now than last summer because near-term inflation expectations have fallen sharply, and long-term inflation expectations have remained anchored.” 

The link between a single 25-basis point interest rate hike and future inflation is tenuous, analysts at the investment bank said before adding that “the FOMC can get back on track quickly if appropriate, and the banking stress could have disinflationary effects.” 

Not everyone agrees with Goldman. The CME’s FedWatch tool, which analyzes 30-day Fed Funds futures pricing data, is predicting an 86% probability of a 25-basis point increase.

For context, it was about 73% just a week ago.

Bitcoin safe haven? 

IDX Digital Assets’s McMillan agrees with the prevailing sentiment, saying a hike of 25 basis points is “probably likely despite the recent banking turmoil.”

“Bitcoin has seen a surprisingly strong bid, which interestingly has correlated with an increase in its dominance ratio, suggesting that bitcoin has been something of a ‘flight to quality’ asset within the crypto ecosystem,” he added.

Bitcoin dominance, which refers to the market capitalization of bitcoin relative to the total market capitalization of all crypto assets, has increased to near two-year highs.

With the recent expansion of the Fed’s balance sheet, there has also been a return of the “bitcoin as an inflation hedge” narrative, McMillan said.

Galaxy Digital’s head of firmwide research, Alex Thorn, said there are two supply events on the horizon for bitcoin beyond the macro outlook — Mt. Gox payouts and the fourth halving expected to occur on March 25, 2024. Halving occurs when the reward for mining cuts is cut in half.

The Mt. Gox payouts are expected to begin sometime in the next six months. Based on reports, the largest holders are expected to take their funds in bitcoin rather than a cash payout. In that scenario, there would be less of a market impact. 

Thorn said there is a good base a year out from halving, with the last three halvings proceeding bull markets.