First Mover Americas: Focus on Fed's Inflation Take

Good morning, and welcome to First Mover, our daily newsletter putting the latest moves in crypto markets in context. Sign up here to get it in your inbox each weekday morning.

Here’s what’s happening this morning:

• Market Moves: Fed set to hike rates by 25 basis points. Fed's language on inflation and recent tightening of financial conditions may inject volatility into the market.
• Chartist's Corner: Bitcoin bulls eye cloud resistance.

And check out the CoinDesk TV show “First Mover,” hosted by Christine Lee, Emily Parker and Lawrence Lewitinn at 9:00 a.m. U.S. Eastern time. Today’s show will feature guests:

• Rebecca Rettig, general counsel, Aave
• Metta Sandiford-Artest, former LA Laker
• Ben Emons, managing director, Medley Global Advisors

Market Moves

By Omkar Godbole

The U.S. Federal Reserve (Fed) will announce its monetary policy decisions on Wednesday at 18:00 UTC. The rate decision will be followed by Chairman Jerome Powell's press conference.

"It makes sense to start the tightening cycle with a 25-basis point rate hike," Morgan Stanley's chief economist, Ellen Zentner, told Bloomberg early Wednesday.

Indeed, a 25-basis point Fed rate hike is a foregone conclusion. Interest rate derivatives show traders are pricing a total of seven quarter percentage point hikes in borrowing costs for 2022. Further, the central bank is expected to raise forecasts for inflation and median terminal rate – the peak interest rate to 3%, as discussed on Friday.

Therefore, risk assets, including bitcoin, are likely to take cues from the central bank's language on inflation and the recent tightening of financial conditions, which could signal the Fed's willingness to pursue aggressive series of rate hikes in the coming months.

The Fed's December statement said: "Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation."

According to Jon Turek, author of the Cheap Convexity blog, the Fed may introduce a hawkish change in the language, emphasizing the need to stop high inflation from becoming a norm and threatening economic growth.

"I think we are due for a hawkish shift to the inflation portion of the statement and that March meeting is when that begins," Turek said in the Fed preview published Tuesday.

"Something to watch for is a sentence to appear in the statement this week that echoes the tone Powell was trying to communicate in his congressional testimony two weeks ago, the Fed is trying to engineer a sustainable expansion. Powell said the Fed will use its tool to make sure that happens and that higher inflation does not become entrenched," Turek added.

The headline consumer price index rose to a four-decade high of 7.9% last month and the core personal consumption expenditure deflator, the Fed's preferred measure of inflation, stood at a 30-year high. Add to that the risk of the Russia-Ukraine conflict sending a new inflation wave across the globe and the possibility of the Fed introducing a hawkish change in the inflation language appears to be strong.

Moreover, such a change may rekindle fears of a 50-basis point rate hike in the coming months, perhaps putting asset prices under pressure. "Powell's tone on inflation will go a long way to showing where he is on the 50bps debate," Turek noted. Traders scaled back expectations for a 50-basis point hike in March following Russia's invasion of Ukraine on Feb. 24.

Powell downplaying the recent tightening of financial conditions during the press conference could also see traders price in aggressive tightening.

Markets have done the Fed's job to some extent, as data tracked by Goldman Sachs shows that U.S. financial conditions have tightened the most since June 2020. That could slow down economic growth in the near term. As such, Powell is widely expected to express discomfort about tightening financial conditions.

Lastly, Fed's comments on quantitative tightening (QT) or the process of balance sheet normalization, a way of sucking out liquidity from the system, will be keenly followed by traders. The Fed discussed QT in December and then pushed out the great balance sheet unwinding to the third quarter just before the war broke out in Europe. A hint of an early start to quantitative tightening may bring selling to the market.

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Bitcoin: Signs of Seller Fatigue, Bulls Eye Break Above Cloud Resistance

By Omkar Godbole

Bitcoin's price action since Russia's invasion of Ukraine suggests seller exhaustion. Despite continued risk aversion, the cryptocurrency has steadily been in the $36,000 to $45,000 range, charting higher lows on the daily chart.

A convincing move above the Ichimoku cloud would perhaps imply a near-term bullish reversal.