Key Takeaways:
- Fed prepares to attack the rising inflation with four interest rate hikes in 2022, instead of the planned three.
- The risk assets generally tend to have a negative reaction to the Fed hikes, but one expert disagrees.
- If the expert is right, Bitcoin, as a risk asset, could benefit from the Fed rate growth.
YEREVAN (CoinChapter.com) – According to the latest forecast from Goldman Sachs, persistently high inflation at 7% will push the Federal Reserve (Fed) to raise the interest rates more than expected this year. Jan Hatzius, Goldman Sachs’ chief economist, presented the Fed’s path for 2022, pinpointing four interest hikes in the year ahead.
Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks. We continue to see hikes in March, June, and September and have now added a hike in December for a total of four in 2022.
wrote he expert.
In hindsight, an interest rate hike would typically suggest a decline in risk asset markets, such as stocks or the cryptocurrency market. After the Fed announced its hawkish intentions, NASDAQ fell over 3%, while S&P 500 lost 2%. Cryptocurrencies, led by Bitcoin (BTC), declined as well. The crypto market lost 13% week-to-date and stood at $1.79 trillion.
However, an expert suggests it’s too early to call the time of death on risk assets.
Interest rate vs. Risk Assets
Russ Koesterich, a portfolio manager for Black Rock investment Management Company, disagreed with the inverse correlation despite some empiric evidence. Instead, he suggested that the interest rate-vs.-stocks relationship is not as linear as expected.
Since 1995, in months when the U.S. 10-year Treasury yield rose by more than 50 basis points (bps), over the following three months the S&P 500 posted a price gain of 3.2%, roughly 100 bps higher than a typical month.
commented the expert.
Mr. Koesterich added that risk assets and interest rates can move together when comparing “valuations to real interest rates.” In detail, the real interest rates are rates minus inflation expectations.
Also read: Even a 200 basis point rate hike in 2022 won’t do sh*t to Bitcoin, suggests Fidelity exec.
The expert looked at the data since the Treasury Inflation-Protected Security (TIPS) market inception. As a result, he spotted a positive relationship between TIPS and the equities multiples, backing his opinion with the chart below.
Based on this relationship you would expect a 50 bps rise in real rates to be associated with equity multiples moving up by one point. While real life is unlikely to conform exactly to the model, the relationship illustrates that real rates and multiples generally move together.
added the analyst.
What about Bitcoin?
As mentioned, Bitcoin falls under the ‘risky asset’ category. Thus, it is also susceptible to fluctuations caused by interest rate hikes. However, even if Mr. Koesterich is right, Bitcoin’s technicals don’t look very reassuring.
The flagship cryptocurrency lost the $40,000 support on Jan 21 and traded at $37,837 in the New-York session. Moreover, BTC could drop below $35,000 in the wake of a Double Top pattern on the monthly chart. The latter features two consecutive highs at a relatively equal level and a decline between them. Once the price action revisits that low point, it drops further, confirming the setup.
Also read: Bullish dollar signals push Bitcoin further into a bear trap.
Considering expert views on the relationship between interest rates and risk asset markets, Bitcoin could benefit from the Fed’s hawkish policy. However, the upcoming months will show if the scheduled interest rate hikes would harm Bitcoin or help the cryptocurrency overcome the crisis.
