The crypto market: Before and after the FOMC meeting

The crypto market spent the majority of Wednesday in a slump, as market volatility increased ahead of the Feb. 1 Federal Open Market Committee (FOMC) press conference.

Investors were eagerly awaiting the FOMC's latest interest rate decision and Federal Reserve Chairman Jerome Powell's views on the United States economy.

Cryptocurrency market performance, Feb. 1 daily timeframe: Coin360

Despite a strong performance in January, the crypto market had been rocked by a string of high-profile failures, including:

News of a bankruptcy examiner finding Ponzi-like use of customer funds from Celsius.
The United States Department of Justice declaring it levied enforcement action against Bizlato.
News of Binance beginning to block certain users' accounts due to concerns over legitimacy.

After initially benefiting from a Consumer Price Index (CPI) print which showed inflation slowing beyond expectations in December 2022, crypto and stock prices began to cool as retail data missed expectations and earnings diminished.

All eyes were on the FOMC for positive news…

And the positive news did come. In a press release, the FOMC declared that they would be increasing the federal funds rate (FFR) by 25 basis points, showing clear signs that monetary tightening is decelerating.

On Nov. 2, 2022, the FOMC bumped the FFR by 75 basis points.
On Dec. 14, 2022, the FOMC bumped the FFR by 50 basis points.
On Feb. 1, 2023, the FOMC bumped the FFR by 25 basis points.

In its press release, the FOMC said: "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated."

The FOMC reiterated that it will continue its restrictive stance on monetary policy until the target 2% inflation rate is achieved, and that "the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."

How BTC reacted and why this is important

BTC's 30-minute chart following the FOMC meeting. Source:
TradingView

Following a day marred by volatility and sideways action, BTC shot up 4.5% in two hours following the FOMC's meeting. Broader market indicators like the Standard & Poor's 500 Index and the Dow Jones Industrial Average mirrored this bullish response.

The federal funds rate is highly correlated with the performance of "risky" investments like stocks and crypto.

A higher FFR is indicative of restrictive monetary policy, meaning the government is trying to reduce the circulation of money so that inflation decreases. When the FFR is high, investors move away from riskier assets toward safer assets.

While the FOMC's meeting still showed that the FFR is growing, it also showed that it's decelerating. As a discounting mechanism, the market pounced on the latter observation, quickly showing optimism for the future.

Ray Salmond, the head of markets at Cointelegraph, provided insight into Bitcoin's price in relation to the FOMC meeting:

"The price action seen in Bitcoin and the wider crypto market reflect traders' anxiety over today's FOMC and Fed Chair Powell's upcoming presser. In previous instances we've seen the market rally in the days leading up to FOMC, then a bit of risk off maneuvering on the day of CPI and FOMC.

If the CPI report or rate hike decision aligns with the expectations of market participants, we've seen an extension of the bullish momentum, but in this scenario, traders will listen closely to Powell's post-FOMC comments on how the Fed will combat inflation while also reducing the size of rate hikes and approaching its set terminal rate.

The recent spate of layoffs in big tech and spun down earnings estimates from brokerages and analysts also raise concerns about the health of the economy."

Traders will be anxiously awaiting the next CPI report for further signs that inflation is slowing, which would provide further incentive for the Fed to loosen its monetary tightening stance.

Get the full story by reading the complete article on Cointelegraph.

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