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Why did the crypto market skyrocket after raising interest rates by 75 basis points?

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While the post-FOMC uptick could be reasonably explained, without forward guidance, a very, very volatile Fed lies ahead of us.

Original title: "Powell hikes 75 basis point and yet Nasdaq & Bitcoin are going to the moon"

Original author: Alf

Original compilation: TechFlow intern

Powell raises rates by 75 bps, but Nasdaq and Bitcoin soar.

What the hell is going on here?

While I disagree with the market narrative unfolding here, let me try to explain why we are witnessing such a rally.

Despite an open acknowledgment that economic growth is softening, the Fed unanimously decided to raise interest rates by 75 basis points - all because of inflation, inflation, and inflation. But the market finally started to bounce back only when Powell went on to say:

"We are now at levels roughly in line with our estimate of the neutral rate, and we will be more data dependent going forward after we have brought forward our rate hike cycle to now."

< p>Let's look at why this is so relevant to the rally.

The neutral rate of interest is the prevailing rate at which the economy lives up to its potential—not too hot or too cold. With this 75bp hike, the Fed has just reached its neutral rate forecast - from now on, they are no longer overheating the economy.

But it also means that any rate hikes from here will put the Fed in aggressively restrictive territory. The bond market knows that every time the Fed imposes restrictions, they break something, so Powell was asked a few very important questions:

Bond Market How about pricing? (70+ bps cut in 2023)

How are financial conditions? (bonds and stocks rebound, easier financial conditions)

Forward guidance?

What does it have to do with rebound?

It all stems from a very strong view that the bond market has developed over the past few months about inflation: it is going to come down, and very fast. Between Jul'23 and Jul'24, CPI was priced around 2.9% = PCE ~ 2.5%, basically on target.

Who would do well in this market condition?

Nasdaq and cryptocurrencies. If the Fed no longer automatically enforces a tightening of financial conditions, real yields will actually start falling again.

Valuation-intensive and sentiment-driven asset classes outperform when real yields fall. This is because the marginal rewards of owning cash dollars become less attractive, and the incentive to chase risk assets is greater: stock indexes and BTC.

Do I think there is room for this round of rebound?

I can reasonably explain the post FOMC rally, but without forward guidance, a very, very volatile Fed is ahead of us. A small hawk speaks and it goes away. You have to factor in some additional risk premium here, not less!

Finally, what does the bond market reveal?

There is some speculation in the bond market on the size of the rate hike between now and December:

50 bps in September

25 bps in Nov

25 bps in Dec

50 bps in 2023

< br>

Of course, Fed hawks could make that number even higher

But it also means that the growth curve will be steeper going forward, because the prospect of long-term growth will not be wiped out by an overly aggressive Fed. Portfolio-wise, this FOMC hasn't really changed my assessment, so my long-term portfolio is:

Long 10+Yr Bonds< /p>

Substantial USD cash flow allocation

Positions in speculative risky assets kept to a minimum