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| By Alex Benfield |
As summer winds down and Labor Day draws near, the impending Federal Open Market Committee meeting will soon be upon us. The late summer euphoria that bolstered the latest rally is waning, as investors sober up to the probability that the Federal Reserve will likely raise interest rates once again … with the odds increasingly in favor of a 50–75-basis-point hike.
Simply put, consumer demand has not dropped enough — despite the large rate hikes this year — meaning the increased rates haven’t slowed down inflation just yet.
But it’s not all bad news. We’re starting to see some of the COVID-related supply chain slowdowns get back up to speed, which means inflation is coming down in certain areas of the economy.
Of course, we’ll have to wait and see what the August Consumer Price Index data — set to be released on Sept. 13 — says before we can draw any concrete conclusions. If the data ends up showing a pattern of slowing inflation, that could spark hope in investors.
Right now, the market is mainly concerned with whether we’re past the peak of inflation, if CPI is trending down to manageable levels and what the Fed’s response might be.
So, will the Fed continue to raise rates to get even closer to the rate of inflation? That’s not likely, but even if they choose to raise rates by just another percentage point higher than the current levels, borrowing rates will increase past reasonable levels for most Americans.
One group that’s been hit particularly hard by drastic interest rate hikes is homeowners. Monthly mortgage payments for a median-priced home in the U.S. have almost doubled since last year, as home and asset prices have skyrocketed.
This means more and more people are getting priced out of the housing market, which is the primary driver of wealth for the average American family.
Most areas of the country are already starting to see a slowdown in the housing market due to these conditions. But if rates go even higher, then we might expect a sharper drop in housing prices. That starts to cause pain to the pocketbooks of a significant portion of the population.
But there’s a possible scenario that hasn’t been discussed at length yet: next month’s CPI report showing lower inflation and a trend of decreasing inflation over the course of a few months.
Such data could suggest that we’re past the peak of inflation, which the Fed could interpret as a sign that their policies have started to take effect. This could lead to the Fed deciding that it doesn’t need a large rate hike in September.
A 25 bps hike or lower will be seen as a sign that the Fed is becoming more dovish and should give investors reason to be bullish once again. There’s a possibility that the Fed finds a sweet spot in the interest rate right around 2.5% —a level just high enough to slow down inflation to a more manageable level … but not too high to break the system.
That scenario would still leave annual inflation at 5% or higher, and the economy would likely not grow or strengthen for some time. What do we call higher-than-average inflation and a stagnant economy? Stagflation.
In a stagflation-ary economy, equities prices don’t offer much in the form of returns.
Investors eventually go looking for returns elsewhere … and what’s the best returning asset class in the last decade?
Bitcoin (BTC, Tech/Adoption Grade “A-”) and other top cryptos.
After witnessing the exorbitant money printing of U.S. dollars in the past few years, eventually investors will want to find a place to put their money that’s immutable and can’t be manipulated and printed away like the dollar can. If that asset class also tends to have a history of high returns, even better.
Adoption trends in one direction, and right now crypto just needs a catalyst. Stagflation might just be that big push needed for crypto to hit mainstream adoption.
In the short term, however, the market has lost some momentum. Investors are still waiting for more clarity about the current state of the economy. The latest rally also happened to be overextended, so a pullback is not too surprising here.
The clarity is coming soon, so if Bitcoin can maintain above the $20,000 level over the next few weeks, it should be able to set a nice base for what could be a further upcoming rally.
Here’s BTC in U.S. dollar terms via Coinbase (COIN):
Ethereum (ETH, Tech/Adoption Grade “A”) has fared a little better in the past few days despite rejection in the area of resistance between $1,800–$2,200. ETH has settled in near support at the $1,600 level and will look to perhaps make another attempt to break through that area of resistance as the Merge draws near.
First it will need to make sure that $1,600 holds in the coming days. Here’s ETH in U.S. dollar terms via Coinbase:
What’s Next
There are quite a few important events coming up in the next month, although nothing significant in the next two weeks. Given that the market just went through an extended rally, perhaps a few weeks of neutral price action would be welcome.
But as we head into the month of September, there are three dates to keep an eye on:
1. The August CPI data is set to be released on Sept. 13. This data will be critical in helping the Fed decide what to do moving forward, especially if it shows a trend of falling inflation.
2. The Ethereum Merge is scheduled to take place Sept. 15–16. Considered perhaps the biggest event in crypto history, this is bound to influence the market. Expect some short-term volatility and major excitement.
3. The FOMC meeting will take place on Sept. 21. At that time, we’ll get word on the potential interest rate hike … and the market appears to be pricing in at a 50-bps hike. If the Fed gets aggressive and goes with a 75-bps hike, expect a major downside to the market, at least in the short term.
On the flipside, a 25-basis-point hike will likely be seen as a bullish sign.
September is shaping up to be a big month. So, let’s enjoy the last few weeks of summer before things start to get serious.
Best,
Alex
