Will Fed Decision Kill Crypto and Stock Rallies, or Is a ‘Soft Landing’ on the Horizon?

Analysts expect the Federal Reserve (Fed) and other central banks to continue decelerating their interest rate hikes at upcoming policy meetings this week.

The Federal Reserve is widely expected to ease its monetary policy tightening amid mounting signs of cooling inflation. Members of the Federal Open Market Committee (FOMC) have signaled in favor of a 0.25 percentage point increase. This would raise the benchmark federal funds rate to a range of 4.5% to 4.75%.

This prospective raise, the second consecutive downshift by the Fed, would mark a return to more normal rates. The central bank had raised rates by 0.5 percentage points at its last meeting, after four straight hikes of 0.75 percentage points last year. Other prominent central banks are also poised to follow suit amid signs their efforts have been taming inflation.

Europe Also Braced for Hikes

Markets anticipate that the European Central Bank will also raise rates by 0.5 percentage points later this week. ECB President Christine Lagarde recently emphasized that the monetary authority would “stay the course” with regard to robust rate hikes. This suggests another 0.5 percentage-point increase, following its last session, raising the deposit rate to 2.5%.

One expert explained that a resilient economy and persistent core inflation will require the ECB to repeat this decision. However, after a further 0.5 percentage points in March, he expects a drop to 0.25 at the following sessions. At this point, he said inflation would peak at 3.5%.

Markets are also pricing in a 0.5 percentage-point rise by the Bank of England at its meeting this week. From a historical low of 0.1% in late 2021, this raise would take the bank rate up to 4%. This is the highest it has been since 2008.

Will Recession Threat Abate?

These decisions have come amid consecutive indicators that efforts to raise rates have been having an effect on cooling inflation. The Consumer Price Index actually declined 0.1% in Dec., compared to the previous month, the lowest since Oct. 2021.

Its year-on-year increase of 6.5%, while high, still represented a decline for the sixth straight month. While rising rates seemed to have dampened inflation, recent data show that GDP growth remained robust in the fourth quarter.

With inflation cooling and the economy intact, markets’ hopes are rising of a “soft landing” to any impending recession. Crypto markets have also responded accordingly, with Bitcoin on the rebound this month.

Both the leading cryptocurrency and runner-up Ethereum have seen a 30% appreciation this month as economic prospects emerge. However, the Fed’s actions will also ultimately be dictated by other relevant economic data expected this week.

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