What Kind of Unkind Surprise Could FOMC Minutes Bring About?

The Federal Reserve is scheduled to release minutes of its January meeting later Wednesday but the market seems to have already moved on.

With minutes from the US Federal Reserve’s January meeting due out Wednesday, crypto traders might be forgiven for dismissing them entirely.

Look how drastically the environment has changed in the past month, the January jobs report showed a much hotter labour market than expected by economists, explaining partly why last week’s Consumer Price Index report came in at a shocking 7.5%, larger than analysts predicted and the fastest pace in four decades.

The fresh data put Wall Street on high alert that conditions were becoming more urgent even than Fed Chair Jerome Powell had telegraphed at the January meeting. Global financial markets reacted by pricing in a much more aggressive rate-hiking cycle by the Federal Reserve.

Inter-Meeting Rate Hike

At one point last week, speculation even mounted over a possible “inter-meeting rate hike” – the idea that the US central bank couldn’t afford to wait until its next regular meeting, scheduled for March, to start raising rates.

James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview that “there was a time when you would just take a situation like this and you would just meet today, off-cycle.”

Bullard’s statement crushed both stock and crypto markets, based on concerns that a more aggressive Fed could send prices for risky assets into a tailspin.

If the Fed surprises markets, the pace of this risk-off move will accelerate, perhaps dramatically. Cryptocurrency will suffer like all risk-off market sectors in this scenario, but perhaps suffer worse because its volatility is so much greater.

Fears of an inter-meeting rate hike by the Fed abated on Monday as US short-term interest rate futures implied just a 3% chance of rate hikes before the next two-day Federal Open Market Committee (FOMC) meeting in March, down from 30% after Bullard’s interview, according to Reuters.

Wholesale price inflation

The Labour Department’s latest Producer Price Index, which was released Tuesday, showed inflation in wholesale prices

at a higher clip than anticipated by economists, reinforcing the case for the Federal Reserve to raise interest rates sooner rather than later.

The Federal Reserve is scheduled to release minutes of its January meeting later Wednesday and some analysts have suggested that the Fed might actively seek to sell off assets – rather than simply letting the bonds roll off at maturity – to shrink the balance sheet even faster.

Just taking a glance at the CME’s FedWatch tool over the past month gives an idea of how much expectations about the Fed minutes have changed since the last meeting. The tool shows the implied level of future Fed rates based on prices from CME futures contracts.

Just one week ago, traders put a 74% chance on a 0.25 percentage-point rate hike in March. On Tuesday, predictions reversed, with 58% of traders now betting on a 50 basis point hike.

Unkind kind of surprise

In general, the Fed does not like to surprise traders, but whether a rate hike happens at next month’s policy meeting on March 16 or at a surprise meeting before, the crypto market will likely be affected negatively, according to some analysts.

Given bitcoin and cryptocurrencies are still correlating somewhat with risk sentiment, we see a surprise hike as having a weighing influence. Any dips in bitcoin (crypto) would be very well supported on its longer-term value proposition.

Some analysts think of bitcoin as a hedge against inflation; however, recent market movements suggest that the volatility in the cryptocurrency market is scaring investors away. The market has been on a downward path since its series of all-time-highs in November, while inflation is still on the rise.

It would make sense that as we enter into a rate hike cycle, some of that underlying bid will be taken back out of the market. This seems very plausible in the short run. However, rates are not the only catalyst that drive value in bitcoin and other cryptocurrencies. Like most markets, this is just a dominant narrative for the moment.