First Mover Americas: Risk Assets Resilient to Faster Fed Rate Hikes, 1994 Cycle Suggests

The latest moves in crypto markets in context for March 25, 2022.

AccessTimeIconMar 25, 2022 at 1:58 p.m. UTC
Updated Mar 25, 2022 at 7:19 p.m. UTC

Omkar Godbole was a senior reporter on CoinDesk's Markets team.

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

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: Past data suggests faster Federal Reserve rate hikes may not lead to renewed bitcoin weakness.
  • Featured stories: Anchor Protocol to readjust interest rates each month.

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.

  • Fernando Martínez, managing director and head of Americas, OSL.
  • Darren Lim, research analyst, Nansen.
  • Mónica Taher, technological and economic international affairs commerce and investments secretariat, government of El Salvador.

Market Moves

By Omkar Godbole

Federal Reserve (Fed) officials are calling for faster monetary policy tightening via interest-rate hikes in increments of 0.5 percentage point (50 basis points) in the coming months. Such an approach contrasts with the more cautious and steady-as-she-goes 0.25 percentage point rate hikes that the U.S. central bank has typically done in recent years.

Would an acceleration of the monetary tightening lead to a big rally in the U.S. dollar and a deeper decline in risk assets, including bitcoin? Probably not, if history is any guide.

"The Fed needs to move aggressively to keep inflation under control. We need to get to neutral at least so we're not putting upward pressure on inflation during this period when we have much higher inflation than we're used to in the U.S.," Federal Reserve Bank of St. Louis President James Bullard told Bloomberg early this week.

"Faster is better. The 1994 tightening cycle or removal of accommodation cycle is probably the best analogy here," Bullard replied when asked how fast the Fed should raise rates.

Cleveland Fed President Loretta Mester said Tuesday that bigger rate hikes would probably be needed at "some" of the remaining six Fed meetings this year.

The 1994 tightening cycle, which began in February of that year and lasted for 12 months, saw the central bank lift rates by 300 basis points, of which 225 basis points of tightening came through three 50 basis point hikes and one 75 basis point hike.

Interest rate rises typically bode well for the domestic currency, especially when the tightening cycle is as steep. However, the U.S. dollar, a global reserve that often acts as a safe haven during risk aversion, fell in 1994.

"The way the dollar traded in 1994 was quite interesting. In theory, this should have been a dollar rip year. The Fed raised rates 'preemptively' against rising inflation. There were already worrying signs in EM, which resulted in the Tequila Crisis at the end of 1994," Jon Turek, author of Cheap Convexity blog, said in an analysis published on March 23. EM stands for emerging markets, such as Mexico and Brazil.

"However, despite weakening EM and an outwardly hawkish Fed, the dollar in ‘94 basically followed its usual hiking cycle analog, peaking into the first hike and falling subsequently," Turek added.

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Dollar Index's performance in 1994 (Cheap Convexity, Bloomberg)

The dollar index (DXY), which tracks the greenback's value, slipped more than 7% to 88.98 in 1994.

So, bitcoin bulls have a reason to be optimistic despite the heightened prospects of the Fed delivering faster rate hikes in the coming months.

Traders, however, should keep an eye on the DXY's daily chart, which shows the greenback has formed a bull flag, a continuation pattern. It means a potential breakout would open the doors for an extended move to the higher side, possibly bringing temporary bearish pressure for bitcoin and gold.

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Dollar Index's daily chart showing a bull flag pattern (TradingView)

The DXY fell 0.9% last week as the Fed raised rates by 25 basis points, kicking off the tightening cycle. Further, the central bank raised inflation forecasts and signaled seven quarter percentage point hikes for this year.

Bitcoin was better bid at press time, trading 8% higher for the week at $44,600. The cryptocurrency rose 9% last week. Unconfirmed reports suggesting that a foundation focused on UST, the world's fourth-largest stablecoin, is accumulating bitcoin seem to have stirred investor interest in the top cryptocurrency.

Latest Headlines

Anchor Protocol Will Readjust Interest Rates Each Month

By Shaurya Malwa

Anchor protocol, the decentralized money market built on the Terra blockchain, will dynamically adjust interest rates each month following a community vote that passed on Thursday.

With the new proposal, payout rates would increase by 1.5% if yield reserves increase and drop by 1.5% if yield reserves fall by 5%. The payout rate change will be capped at 1.5%, which means that this is the maximum they can increase or decrease by.

The move is aimed at making Anchor more sustainable in the longer term. Anchor used to offer payout rates of up to 20% for depositing UST, Terra's dollar-pegged stablecoin.

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Omkar Godbole was a senior reporter on CoinDesk's Markets team.

CoinDesk - Unknown

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

CoinDesk - Unknown

Omkar Godbole was a senior reporter on CoinDesk's Markets team.

CoinDesk - Unknown

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.