What Does The FOMC Minutes Portend For The Crypto World?


Cryptocurrencies are trading in a tight band early on Wednesday amidst an anxious wait to the minutes of the Federal Open Markets Committee meeting held in the first week of May. The Fed had raised the target for the fed funds rate by half a point to 0.75%-1% during its May 2022 meeting and also announced a phased transition to a Balance sheet reduction of $95 billion per month.

Despite the Fed Chair Jerome Powell categorically stating that the Fed would not hesitate to keep raising interest rates until inflation falls in a clear and convincing way, markets are eagerly waiting for the minutes to assess the aggressiveness on display during the course of the previous FOMC meeting.

The Minutes could indicate to what extent the Fed decision makers would be willing to act, to further the inflation-management agenda. The FOMC Minutes would be released at 2 p.m. ET.

The Fed’s previous instance of interest rate tightening happened in December 2015 when the Federal Funds rate, which was at 0.25 percent since 2008, was increased to 0.50 percent. The rate hiking cycle continued till December 2018 and in a span of three years, the interest rates were hiked by a total of 225 basis points to 2.50 percent.

When the Fed commenced its interest rate tightening cycle in December 2015, inflation was at 0.1 percent. Overall crypto market capitalization was around $7 billion and the Fed’s Balance Sheet size was around $4.5 trillion.

On the contrary, when the Fed in March 2022, began its current cycle of interest rate tightening, inflation was at a multi-decade high of 8.5 percent. Overall crypto market capitalization was at $1.8 trillion, which was more than a fifth of the Fed’s Balance Sheet size of $8.9 trillion.

Central banks worldwide use interest rates as a tool to control inflation. Increase in interest rates would increase the cost of borrowing, leading to a decline in borrowings as well as money supply in circulation. Reduction in money supply would reduce the money spent on goods and services and thereby the prices.

The Balance Sheet reduction plan aims to reduce the Fed’s massive holding of assets, caused by the purchases it did to bolster the economy, in the wake of the Covid-19 pandemic. Now that the job market is close to full employment and the inflation is at a multi-decade high, the Fed feels it is time to unwind the assets.

Crypto world’s anxiety stems both from the opportunity cost and valuation perspectives. Increase in interest rates would increase the opportunity cost of holding non-interest-bearing crypto assets. The reduction in the Fed’s Balance Sheet size would cause a withdrawal of excess liquidity from the economy, which could adversely impact asset valuations.

Between January 2020 and March 2022, when the Fed undertook asset purchases, its Balance Sheet increased from $4.2 trillion to $8.9 trillion. During the same period, crypto market capitalization had increased from $250 billion to $2.1 trillion. It has since fallen to $1.26 trillion, in a span of two months.

Lingering concerns on how aggressive the Fed would be in combating inflation and its likely willingness to compromise on economic growth for the sake of anchoring inflation, therefore continue to dominate crypto market sentiment.

Top ranked Bitcoin is trading at $29,566.54, gaining 1 percent overnight. At the current market capitalization of $561 billion, BTC dominates 44.7 percent of the overall crypto market.

Rival contender Ether has edged down to trade at $1,960.25. Ether’s market capitalization has decreased to $237 billion, while market dominance is at 18.8 percent.

5th ranked BNB (BNB) edged up close to 2 percent, whereas 6th ranked XRP (XRP) gained a little less than 1 percent.

8th ranked Cardano (ADA) is around half percent above Tuesday’s levels.

9th ranked Solana (SOL) declined 1.3 percent. 10th ranked Dogecoin (DOGE) is trading near the flatline.

In the stablecoin space, overall market capitalization edged up to $160 billion, implying a market dominance of 12.7 percent.

Top ranked Tether (USDT), ranked third overall, traded between $0.9988 and $0.9992 and accumulated a market cap of $73 billion. Second ranked USDCoin (USDC), ranked fourth among all cryptos traded between $0.9998 and $1.00, with market cap aggregating to $53 billion. Binance USD (BUSD), ranked 7th overall traded between $0.9986 and $1.00, and market cap amounted to $18 billion.

Overall crypto market capitalization has increased by 0.55 percent in the past 24 hours to $1.26 trillion. According to the ranking of all assets by market cap published by companiesmarketcap.com, Gold (market cap: $11.8 trillion), Saudi Aramco (market cap: $2.4 trillion), Apple (market cap: $2.3 trillion), Microsoft (market cap: $1.9 trillion), Alphabet (market cap: $1.4 trillion) rank higher. Silver has a market cap of $1.23 trillion.

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