Crypto Markets Surge As Investors Predict Fed Pause

As higher interest rates squeeze US banks, investors are betting the Federal Reserve will slow or even pause rate hikes. Crypto markets have taken note.

A rally that began over the weekend was given a boost Tuesday morning, with the release of US inflation data that hardened investor expectations of a quarter-percent interest rate hike at the Fed’s March 22 meeting.

Inflation rose 0.4% in February, down from half a percent the month before. So-called core inflation, however, rose to half a percent in February from 0.4% the month before. Core inflation strips out the volatile prices of food and energy and is considered a more reliable gauge of inflationary pressure.

As of noon Tuesday, the global market capitalization of digital assets has jumped more than 23% from a Friday low, according to data from CoinMarketCap.

The two largest cryptocurrencies, Bitcoin and Ether, jumped almost 30% and 25% over that same period, far outpacing the broader equities markets. The S&P 500 and the Nasdaq have rallied about 1.5% and 3% since Friday.

Over the past week, three major banks, all of them friendly to the crypto industry – Silvergate, Silicon Valley, and Signature – closed or were made to close amid a run on deposits.

But the Federal Reserve, in a joint statement with other US banking regulators, said on Sunday it would provide funding to Silicon Valley Bank and Signature Bank so they could repay all customers in full. Silvergate had previously announced it would be able to honor customer withdrawal requests.

The government’s move allowed Circle, the issuer of the dollar-pegged stablecoin USDC, to move its assets from Silicon Valley Bank to Bank of New York Mellon on Monday.

That quelled fear that USDC, one of the most important assets in the crypto ecosystem, would be cut off from the dollars that back it. Panicking traders sold their USDC over the weekend, and the token briefly lost its peg, falling as low as $0.88 before recovering.

USDC Finds Stability Near $0.97 After Crashing on SVB Concerns

Circle said the stablecoin will be redeemable for US dollars starting Monday.

The Defiant

Rising interest rates have had “dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,” Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, said in a speech last week.

“First, as a result of the higher interest rates, longer-term maturity assets acquired by banks when interest rates were lower are now worth less than their face values,” Gruenberg explained. “The good news about this issue is that banks are generally in a strong financial condition, and have not been forced to realize losses by selling depreciated securities.”

Later that week, when Silicon Valley and Signature banks suffered a run on their deposits, Gruenberg’s warning came true – both were forced to sell assets at a loss, prompting regulators to step in.

Investors are now betting Federal Reserve Chairman Jerome Powell will temper interest rate hikes to avoid further destabilizing the banking system.

Raising rates – at the steepest pace in decades – is meant to cool the economy and, in turn, inflation. When strong job market data was released last week, it seemed as though the Federal Reserve would stay the course.

As of last Monday, there was no chance the Federal Reserve would decide at its March 22 meeting to keep interest rates at their current levels, according to the CME FedWatch tool, which tracks the price of Fed Funds futures. Almost 70% of investors thought the Fed would raise rates by a quarter of a percent. The remaining 30% thought the Fed would raise rates by half a percent.

But things have changed. As of Monday evening, the CME FedWatch tool puts the odds of no hike at 35%, and the odds of a quarter-percent hike at 65%. Investor confidence in a quarter-percent hike grew to 80% Tuesday after the release of US inflation data.