Key Takeaways:
- The war in Ukraine stirred a debate among experts for possibly halting the intended interest rate hikes.
- The Federal Reserve officials had earlier agreed to begin rate cuts in March.
- “Slamming the breaks” on interest rate hikes devided opinions.
- The Fed does not intend to pivot in the next month.
- Inplications for Bitcoin and the crypto market might be bearish.
YEREVAN (CoinChapter.com) – A month-long tension between Russia and Ukraine culminated in a full military invasion by land, air, and sea on the morning of Feb. 24. As a result, the economic implications of the invasion resonated globally, reaching across the pond.
The worst security crisis in Eastern Europe since World War II might have dampened the Federal Reserve’s determination to raise interest rates and fight the growing inflation and, by extension, influence the crypto market.
Interest rate hikes against inflation as Ukraine crisis grows serious
According to the U.S. Bureau of Labour Statistics, the consumer price index (CPI) reached 7.5% in Jan. 2022, the highest in four decades. That prompted the Fed to implement tapering mechanisms, i.e., reducing the pace of its bond purchases. Moreover, the plan included several interest rate hikes throughout the year.
Participants observed that, in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate.
read the meating summary.
Also read: Bitcoin drops alongside risky assets, Gold steady as Fed confirms aggressive interest rate hikes.
However, the policymaking Federal Open Market Committee (FOMC) decided that the tapering wouldn’t start until Mar. 2022, citing concern over financial stability and “substantial risk” caused by loose monetary policy.
Debate on “slamming the breaks”
Moreover, the “substantial risk” concerns increased after the Ukraine invasion and prompted some experts to call for more caution, noting the unstable geopolitical situation. For example, Mohamed El-Erian, an advisor for Allianz&Gramarcy firm, voiced his worries on CNBC’s Squawk Box on Feb. 24.
[The war] takes the 50 basis points completely off the table. It takes the 8-9 hikes, that people were talking about for this year, off the table. And thankfully so. […] I didn’t think the U.S. economy could accommodate and live with such slamming of the breaks.
The Fed will have to be more careful, and tolerate higher inflation.
Mr. El-Erian asserted.
Also read: Bitcoin falls below $35K, gold rallies as Russian army invades Ukraine
However, the Fed might not entirely agree with the point of view. For example, Governor Christopher Waller opposed the idea of exercising more caution despite a looming Ukraine crisis and its impact on the global supply chain.
With the economy at full employment and inflation far above target, we should signal that we are moving back to neutral at a fast pace. A 50-basis point hike would help do that.
said the Governor.
What will the Fed do?
Overall, the central baking system signaled that the intended interest rate hikes are still in order, despite the current situation’s unpredictability. Mike Wilson, the chief U.S. equity strategist at Morgan Stanley, told Bloomberg that the war in Eastern Europe would not change the Fed’s course of action for the next month.
We know the data is not going to get meaningfully better. It may get meaningfully worse if oil prices spike. The thing that’s gonna take Fed to pivot is not going to be the inflation coming down too fast. It’s going to be the growth starting to really roll over.
said the CIO.
Also read: Bitcoin (BTC) becomes legal in Ukraine as the country prepares for a possible war.
The executive added that the Fed might pivot in the coming three to six months, but it wouldn’t be for good reasons. Moreover, those reasons would “probably be equity-disfavorable.”
What does it mean for Bitcoin and the crypto market at large?
The “equity-disfavorable” reasons could potentially be crypto-disfavorable as well if Bitcoin’s correlation with the stock market persists.
Notably, the alpha crypto exhibited a growing correction with the risk-on assets in the previous months. Experts in the fiat economy and the crypto sphere spotted the unity, as CoinChapter reported earlier.
Hence, Bitcoin temporarily parted ways with safe-haven assets, such as Gold, which could mean its susceptible to market conditions that potentially harm risk-on assets.
Notably, any fear, uncertainty, and doubt on a global scale typically prompt traders to withdraw from risk-on markets and allocate to safe-haven assets. Thus, the “equity-disfavorable” conditions mentioned above could also potentially harm Bitcoin.
Furthermore, the alpha crypto has been consolidating sideways around $38,200 for the previous three days. Thus, the global developments will show what awaits Bitcoin in the observable future.
Also read: Bitcoin, stocks, ruble: Putin's invasion of Ukraine hurt all at once.
The debate on the Fed’s actions underscores several key meetings and occasions over the next few weeks. Hence, here are events to watch for:
- January figures on the Fed’s preferred inflation gauge, due Friday, Feb. 25
- Fed Chair Jerome Powell’s semiannual monetary-policy testimony to Congress on March 2 and 3
- The February employment report on March 4
- February data on the consumer price index, due March 10.
