Doubts about the Fed's rate hike

Faced with inflation, calls for the Federal Reserve to raise interest rates are growing louder.

Killing the possibility of an early rate hike

Since St. Louis Fed President James Bullard said that "interest rates should be raised by 100 basis points before July", the market has speculated that the Fed may raise interest rates in February and end the QE policy early. However, with the release of the Fed's final monthly Treasury purchase schedule at 3 p.m. EST on Saturday, it is believed that any speculation about an early rate hike has been effectively killed.

According to the schedule, the United States will purchase a total of US$20 billion in Treasury bonds through eight operations in the next month. The last US$4 billion bond purchase will take place on March 9, which is in line with expectations.

The likelihood of an emergency rate hike by the Fed continued to decline after the release of the timetable, as Fed officials have said it is unlikely to raise rates before the end of the bond-buying program.

In addition, although there are concerns that the Federal Reserve will take action at a closed meeting tomorrow morning, analyst Garfield Reynolds pointed out that this meeting is more like a routine matter . The meeting will only evaluate the advance interest rate and discount rate charged by the Federal Reserve to banks, which is exactly the same as the closed-door meeting held on January 18.

Rate hike path forecast

Higher-than-expected CPI data released last week increased pressure on the Federal Reserve to take a firmer stance on surging prices, and major investment banks also raised their expectations for the Fed's 2022 rate hikes.

Citigroup currently expects the Federal Reserve to raise interest rates by 150 basis points this year, with a 50 basis point increase in March and then a 25 basis point increase in each of the four meetings in May, June, September and December.

HSBC economist Ryan Wang pointed out in a report to clients that the Fed will seek to tighten policy sufficiently to allow inflation to begin to decline in the second half of this year. It is expected that the Fed's rate hikes will be concentrated in the early stage, with a 50 basis point increase in March, four further rate hikes of 25 basis points each this year , and two more rate hikes of 25 basis points each in 2023. In addition, the Fed is expected to start quantitative tightening from the third quarter.

Jan Hatzius, chief economist of Goldman Sachs , raised his forecast for the Fed's 2022 rate hike to seven consecutive 25 basis point hikes in a report to clients. He previously predicted five rate hikes this year. Goldman Sachs still expects the FOMC to raise rates three more times in the first three quarters of 2023 at a gradual pace of once a quarter, with the terminal rate reaching the previously predicted 2.5-2.75%. He said he saw the view that there would be a 50 basis point rate hike in March, but believed that the more likely path was to raise rates by 25 basis points more times.

Jefferies Group released a report saying that as a reasonable base case, the Federal Reserve is currently expected to raise interest rates seven times this year, by 25 basis points each time, and does not rule out the possibility of a 50 basis point rate hike in March. The Federal Reserve has been reluctant to provide guidance, and in the absence of current guidance, a 50 basis point rate hike may be seen as a green light for expectations of larger rate hikes in May and June, or lead to a tighter financial environment. According to Jefferies Group's updated model (which incorporates four rate hikes next year into pricing), "the real 'pain' will begin in 2023, when monetary policy will turn GDP growth from 0.6% to a contraction of 0.3%."

From the perspective of Fed officials, Bullard currently supports a 50 basis point rate hike in March. Fed President Bullard (President of the Federal Reserve Bank of St. Louis, who has a vote on monetary policy this year) said he supports a 50 basis point rate hike once, and a 100 basis point increase before July 1. Currently, Bullard's plan includes three rate hikes, starting with a balance sheet reduction in the second quarter, and then deciding the interest rate path for the second half of the year based on the latest data. He said he has not yet decided whether to raise interest rates by 50 basis points at the March meeting, and will respect Powell's decision.

Other Fed officials either oppose or think that the timing is not right for a 50 basis point rate hike. Fed's Barkin (who has a vote on monetary policy this year) said: Conceptually, I am open to a 50 basis point rate hike, but if a 50 basis point rate hike is needed now, I have to be convinced . I believe that the number of employed people has increased, but I have not yet found it in the data. We will get the data we need in March. Fed's Daly (President of the Federal Reserve Bank of San Francisco, who has no vote on monetary policy this year) said on Sunday that the Fed should proceed cautiously on the path of raising interest rates, otherwise it may have a counterproductive effect on economic growth and price stability . Daly also pointed out that the continued geopolitical tensions on the border between Russia and Ukraine are another factor that adds uncertainty to the US economy. She said that financial markets have digested the factors of the Fed's withdrawal of asset purchases and interest rate hikes next year.

Prediction of the impact on cryptocurrency trends

The market is worried that the Federal Reserve will accelerate its pace of interest rate hikes, which will cause large fluctuations in the U.S. stock market and also affect the trend of cryptocurrencies. Generally speaking, selling higher-risk assets has become one of the risk-averse strategies.

Ed Moya, senior analyst at Oanda, said that the increased pressure on high-risk assets has a direct impact on Bitcoin, and the price of high-risk products may fall by 40% at any time. JPMorgan Chase believes that based on the volatility of Bitcoin compared with assets such as gold, the reasonable value of Bitcoin is only $38,000, which is 15% lower than the current price. However, JPMorgan Chase strategists are still very optimistic about Bitcoin's long-term forecast. They estimate that Bitcoin's future price may reach $150,000, higher than the estimated $146,000 a year ago. Vanda Research pointed out that unfavorable factors for Bitcoin have emerged, and short-term pressure is believed to be due to increased liquidation, and it is confident that the price can be maintained at $47,000.

Goldman Sachs analysis believes that commodity prices (Bitcoin belongs to commodities) are unlikely to be suppressed by the Fed's interest rate hike. The investment bank said, "Rate hikes will slow economic growth a year later, but will not affect spot assets such as commodities because these commodities price current rather than future trends." This means that such physical assets do not face the risks associated with the Fed's interest rate like other financial assets. Goldman Sachs said that against the backdrop of a bullish global economy, "It is a rare good time to add commodities to your portfolio to hedge against inflation, geopolitical risks and potential adverse market conditions."

According to previous Golden Finance research on the blockchain and encrypted digital asset industry and an interview with practitioner Gu Yanxi: "Don't pay too much attention to the impact of the Fed's policies on the price of Bitcoin. Bitcoin prices are affected by many factors, but the Fed's policies are not the main factor affecting Bitcoin , because there is already enough money in the market to determine the price of Bitcoin. This is similar to the Fed's policies not affecting the issuance of Tether. Even if the price of Bitcoin changes due to the announcement of the Fed's policies, this causal relationship is false and temporary."

Gu Yanxi said: "If a major global regulator takes regulatory measures against a major cryptocurrency exchange, the impact on the price of Bitcoin will be much greater. But even so, such an impact will be very short-term."