Have Cryptos, Stocks Reacted Differently To FOMC Minutes?

The US central bank is continuing its efforts to tame inflation with interest rate hikes and Wednesday’s FOMC minutes have showed that the committee members agreed on the necessity of keeping interest rates higher as a means of combating inflation.

Markets were cool in the hours leading up to the release of the minutes; major cryptocurrencies and stock indices showed steady downtrends in the hours before the announcement. However, stock and crypto markets appear to have opposite responses to the news in the hours since the minutes were released.

Both the Nasdaq and Dow Jones Industrial Average enjoyed brief surges immediately following their release—from 12,935 to 13,053 and from 33,988 to 34,159 respectively within the first hour. Both were short-lived, however, and they are now trading at pre-announcement levels.

Cryptocurrencies, on the other hand, took an immediate but modest hit. Bitcoin and Ethereum both continued mild downturns in the wake of the announcement. They suffered 2.5% and 2% losses on the day, respectively.

Prior to the minutes release, Bitcoin withdrawal from exchanges continued. Proponents expected the market to react to signs Fed members will continue with more aggressive interest rate hikes, increasing the pressure on Bitcoin price.

Investors are digesting the minutes before making their next move. Any signals of an unusually large increase in interest rates would caution investors and result in them pulling capital out of exchanges.

After initially surging more than 4% early this morning during Asian trading hours, top cryptocurrencies Bitcoin (BTC -2.06%), Ethereum (ETH -1.94%), and Dogecoin (DOGE -6.95%) have each moved lower in early afternoon trading. As of 1 p.m. ET, these three tokens have slumped 1.5%, 2%, and 2.2%, respectively, over the past 24 hours.

The moves for top tokens tracked the price action for global equity markets quite closely. Most major Asian indices moved higher overnight. However, US equity markets have moved lower today as investors awaited the release of the minutes. Concerns around the forward hiking schedule of the Fed saw bond yields shoot higher today, affecting all risk assets, including cryptocurrencies.

Investors across all risk assets appear to be remaining cautious right amid uncertainty over the next steps by the Federal Reserve, so, investors have had a difficult time anticipating when a shift toward more accommodative monetary policy might come about.

For cryptocurrencies, it is clear that the very dovish monetary policy from the Fed following the pandemic provided the fuel for an incredible bull-market rally through the end of 2021.

Accordingly, given the decline in higher-risk asset classes following a very hawkish shift, investors are looking for the next surge in cheap money-fueled speculation await some additional clarity from the Federal Reserve as to how the central bank is thinking about the issues at hand.

Generally speaking, since the very beginning of the pandemic, the crypto market has traded in a relatively high correlation to equity markets. As of May 2022, the crypto sector’s correlation to equities hit its highest level ever. Accordingly, how stocks perform matters a great deal for the higher-volatility performance of the crypto higher-risk asset class.