 |
| By Alex Benfield |
The Federal Reserve hiked rates at a historic pace in 2022, taking the U.S. from near-zero interest rate levels to the current 4.5%–4.75% Fed Funds rate.
Those might seem like small numbers, but that is an extremely drastic shift in a very short period.
If you have been an avid reader of these articles over the past year, then you know exactly how these rate hikes have affected the market. And you are also aware of how unpredictable days when we get the Federal Open Market Committee minutes can be.
It is also clear that these higher rates have also caused trouble and panic in the banking sector.
For instance, U.S. Treasurys have been considered risk-free for decades. However, after interest rates were suppressed at near-zero levels for just about a decade, banks loaded up on Treasury notes that yielded next to nothing.
After interest rates exploded in 2022, those so-called risk-free USTs are trading for 70–85 cents on the dollar on the secondary markets.
That means almost every bank is holding on to massive amounts of mark-to-market losses. To avoid those losses, the banks are left with no choice but to hold those USTs to maturity … if they can.
That has already proved to be too tall a task for some banks. We have so far seen the downfall of Silvergate, Silicon Valley Bank, Signature and most recently, Credit Suisse.
I want to emphasize “so far.”
There are plenty of other banks on thin ice, but I will refrain from naming names.
Ultimately, this is not a problem of just a handful of banks that made some bad decisions; this is a systemic issue among the entire banking sector.
And one that will require a lot of attention and help to be fixed.
The question today is: Will Chair Jerome Powell and the Fed divert attention away from inflation to help alleviate some of the issues in the banking sector?
We will find out at around 2 p.m. Eastern with the FOMC decision to raise, pause or lower the Fed Funds rate.
Just two weeks ago, the market seemed to think that a 50-basis-point hike was on the table. Now the debate is if the Fed will start to cut rates now or in a few months
Needless to say, the whole financial world is waiting to see what will happen.
I have flip-flopped over the past few days as to what I expect to happen, but my final prediction is that Powell will continue his crusade against inflation and raise rates by 25 bps today.
I believe that is the wrong move to make and will only exacerbate our current problems.
However, I believe Powell will do this to maintain credibility for the Fed and to attempt to build on his legacy as a Paul Volcker-style inflation hawk.
Either way, I also expect Bitcoin (BTC “B+”) to react positively to the news.
Despite all the troubles in the banking sector, Bitcoin is holding up extremely well. In fact, BTC is up more than 46% since the low it made after the initial panic from the banking sector on March 10.
Currently, BTC is trading above $28,000 and has made a new cycle high today as it approaches $30,000 — a level not seen since June 2022.
Make no mistake: Bitcoin will be entering critical territory if it can manage to break through resistance at $30,000.
That $30,000 level acted as a key support level throughout much of the last bull market, and there is not a ton of resistance between $30,000 and $40,000. So, Bitcoin could move fast if it breaks through that level in the next few days.
Meanwhile, Ethereum (ETH, “B”) has been moving a bit slower over the past few weeks. That said, it has now cemented itself above that key $1,650 resistance level and sits at just above $1,800 today.
The next big resistance level on ETH’s chart is $2,000, which it could approach very soon. After bouncing off its 200-week moving average on March 10, ETH has gained more than 30% in the last 12 days.
While Bitcoin has seemingly stolen the show over these past few weeks, Ethereum’s chart looks great right now. The only thing missing is a break above overhead resistance.
Click here to view full-sized image.
What’s Next
It appears crypto traders are waiting to see the results of today’s FOMC meeting before making their next move … just like the rest of the financial world.
Today’s decision will have massive repercussions throughout the many aspects of international finance.
We have predicted before that the Fed would hike until something in the markets broke. And with the recent troubles in the banking sector, it appears something is indeed broken.
However, now we must question if the Fed understands that … or if they will continue to hike in the face of these troubles.
We will know by 2 p.m. today. But if this morning’s crypto price action is any hint, crypto prices will continue showing strength no matter the final decision.
Best,
Alex
