Analysis: The underlying logic behind the crypto market's strong rebound after a 75BP rate hike
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Analysis: The underlying logic behind the crypto market's strong rebound after a 75BP rate hike
Powell hikes rates by 75 basis points, yet Nasdaq and Bitcoin surge.
Navigating Web3 tides with focused insightsAuthor: Alf
Compiled by: TechFlow intern
Powell hikes rates by 75 basis points, yet the Nasdaq and Bitcoin surge.
What exactly is going on here?
Although I don’t agree with the current market narrative unfolding, let me try to explain why we’re seeing this rebound.
Despite openly acknowledging that economic growth is weakening, the Fed unanimously decided to hike by 75 bps—driven entirely by inflation, inflation, and inflation. However, it was only when Powell went on to say the following that markets finally began to rebound:
"We are now at a level that is broadly consistent with our estimate of the neutral rate. After front-loading our hiking cycle, we will become increasingly dependent on incoming data."
Let’s explore why this statement is so significant for the rally.
The neutral rate is the interest rate at which the economy operates at full potential—neither overheating nor contracting. With this 75 bps hike, the Fed has just reached its estimated neutral rate—meaning from here on out, they are no longer stimulating the economy.
But this also implies that any further hikes will place the Fed firmly into restrictive territory. The bond market knows that every time the Fed becomes restrictive, something eventually breaks. So Powell faced several critical questions:
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What is the bond market pricing in? (Pricing over 70 bps of cuts by 2023)
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What about financial conditions? (Bonds and stocks rebounding, financial conditions easing)
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And forward guidance?
How does this relate to the rally?
It all comes down to the very strong view the bond market has formed over the past few months on inflation: it will decline—and quickly. Between July 2023 and July 2024, CPI is priced around 2.9% = PCE ~2.5%, essentially hitting the target.
Which assets perform well under these conditions?
Nasdaq and cryptocurrencies. If the Fed stops automatically tightening financial conditions, real yields will actually start falling again.
When real yields fall, valuation-sensitive and risk-on asset classes tend to outperform. This is because holding cash dollars becomes less attractive at the margin, increasing the incentive to chase risk assets: equities and BTC.
Do I think this rally still has room to run?
I can reasonably justify the post-FOMC rally, but without clear forward guidance, we face an extremely uncertain Fed. A single hawkish comment could erase everything. You must price in additional risk premium here—not less!
Finally, what is the bond market signaling?
Between now and December, the bond market is pricing in the following rate hikes:
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50 bps in September
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25 bps in November
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25 bps in December
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50 bps in 2023
Of course, a more hawkish Fed could push these numbers higher.
But this also suggests a steeper future yield curve, as long-term growth prospects won't be crushed by an overly aggressive Fed. From a portfolio perspective, this FOMC hasn’t fundamentally changed my outlook. My long-term portfolio remains:
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Long duration bonds (10+ years)
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Significant allocation to USD cash
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Minimal exposure to speculative risk assets
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