The Growing Disconnect Between Main Street and Wall Street
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| By Alex Benfield |
Today, we once again find ourselves anticipating the Federal Open Market Committee's decision on interest rates.
Since the start of 2022, we have seen how these rate hike days can swing prices drastically right after the news breaks.
Overall, the FOMC meetings have become a routine catalyst for market volatility and shifts in investor sentiment.
However, what sets today apart is the growing consensus that this could be the Federal Reserve’s last chance to hike rates.
Although many investors expected rate hikes to stop months ago, the current state of the banking sector and other economic weaknesses make me believe we have finally reached the long-awaited tipping point.
If the Fed decides on another 25-basis-point hike, that will bring the Fed funds rate to a smooth 5%–5.25%.
And that’s exactly what I expect to happen this afternoon: A 25-bps hike so Fed Chair Jerome Powell can leave rates at a nice and even 5% to battle inflation.
Will a 5% Fed funds rate be high enough to effectively control inflation? That is left to be seen.
However, I don’t think there is any doubt that raising rates to a height of 5% in less than a year and a half will have countless consequences for our economy … let alone the banking sector.
Let’s not forget the main problem banks are facing today is that they did not effectively hedge against interest rate risk. That problem only gets worse with rates 25 bps higher.
Just this week, we witnessed the demise of First Republic Bank — the 14th largest bank in the U.S. at the start of the year. This now marks four large bank failures in just the past two months.
If the banking crisis continues to escalate, the situation could become catastrophic for the economy, and it could lead to a credit crunch. In turn, this could lead to less lending and liquidity in the overall economy.
Now, we have said it before, and we will say it again: 2023 is likely to be a neutral year in the crypto markets.
That might sound surprising given the fact that prices have been increasing substantially all year long up until this point.
In fact, Bitcoin (BTC, "A-") is up more than 70% year to date. And Ethereum (ETH, “B”) isn’t too far behind, as it has climbed 55% since January.
However, we don't foresee a continuous upward trajectory for the rest of the year. This is because corrections, dips and bearish momentum will likely come into play.
Once the economic reality of elevated interest rates sets in, we can expect reduced demand and its subsequent repercussions. As liquidity dries up and investors seek capital elsewhere, crypto market demand may wane.
While prices could suffer, this presents an opportunity to invest in promising projects at a discount ahead of the next bull market, which we predict will emerge sometime in 2024.
Even though we expect those good buying opportunities to come at some point this year, investors are unsure of the market's next move.
One possibility is that the rally that started in March could have one more leg up as we head into summer.
Conversely, the market might be running out of momentum as it processes the reality that the Fed pivot — and the liquidity that comes with it — may not arrive anytime soon.
As always, the charts should tell us the answer in the coming days.
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For now, BTC is trading at just above $28,000 as it has failed to establish itself above that $30,000 mark despite multiple tries.
Bitcoin should find solid support at both the $26,000 and $27,000 levels if prices decline from here.
In general, it is unlikely that prices will remain at current levels for too much longer.
Meanwhile, Ethereum has been trading below its moving average for almost two weeks now after failing to flip the $2,000 level into support.
Over that timeframe, $1,800 — the top of the previous trading range — has been acting as support. Should prices decline further, ETH should find support at both the $1,700 and $1,550 levels.
However, if the bulls come bursting out the gates after the FOMC minutes are released, look for ETH to finally establish itself above $2,000 and clear its previous high of $2,150.
Click here to see full-sized image.
Anticipating the market's direction during such an uncertain time such as this is a fool's errand. The smart move is to wait and let the charts tell us what will happen next.
Much of the focus of today’s FOMC announcement will be on the future outlook instead of whatever raise may occur today.
If the Fed projects confidence that the worst of inflation is behind us, markets should rally. On the other hand, should the Fed appear to lay groundwork for further rate hikes, Wall Street will cower.
However, despite whatever words come out of Jerome Powell’s mouth today, the current economic conditions will do no favors for Main Street. Without a pivot and some aggressive money printing this year, the chances of a recession remain high.
The disconnect between financial markets and the American economy grow by the day, and more people are waking up to that reality.
Eventually, investors will look for an escape, and crypto will emerge as the last bastion of hope for those looking for financial freedom.
Until then, we will remain patient.
Best,
Alex
