Risk-on Assets Rally on Priced-in Tapering “Later this Month,” But Aggressive Rate Hikes Would Be “Extremely Bearish”

The US Federal Reserve has announced that it will soon begin reducing the speed of its monthly bond purchases.

Tapering will start “later this month,” said the policymaking Federal Open Market Committee (FOMC) in its post-meeting statement. Under this process, monthly purchases will be reduced by $15 billion – from the current $120 billion a month that the Fed is currently buying.

The move came “in light of the substantial further progress the economy has made toward the Committee’s goals since last December,” it added.

As for raising the interest rate from near zero, the FOMC voted a unanimous no on that one. Fed Chairman Jerome Powell said he wants to see the labor market “heal further” before taking that action.

“We don’t think it’s time yet to raise interest rates,” Powell said. “There is still ground to cover” before the Fed reaches its economic goals.

The paring of bond purchases is expected to conclude around July 2022 on its current schedule, and the central bank officials do not envision a rate hike before that.

Meanwhile, the Fed altered its view on inflation slightly, acknowledging that price increases are rapid but maintaining that it is “transitory” still.

“Inflation is elevated, largely reflecting factors that are expected to be transitory,” the statement said, attributing this jump to supply and demand imbalances driven by the pandemic and the reopening of the economy.

Powell said he expects inflation to remain elevated “well into next year” but said as supply chain bottlenecks abate and growth moves up, inflation will decline, which will support “continued gains in economic activity and employment.”

The Bank of England is now set to meet on Thursday, and the market expects the central bank to hike rates in the face of surging inflation.

Market Reacts Positively

While the Fed is ready for its first step towards pulling back on the massive amount of help it had been providing markets and the economy since last year, it was already priced in as we saw in the markets reaching for fresh highs.

“Fortunately, the taper has long been priced in. Aggressive hikes, though, if they were to materialize, that'd be extremely bearish. And yes, the Fed will hike,” commented trader and economist Alex Kruger.

Global stocks traded at new record-high levels while the US Treasury yields and the dollar edged down.

Much like the traditional market, crypto rallied. The total market cap went on to hit $2.89 trillion as Ether made a new all-time high at $4,675.

“Ethereum has been the clear winner of the Layer-1s for what we believe will be a substantial shift in a potentially prolonged market sentiment uplift. Ethereum will also continue to play a major role in the NFT and metaverse ecosystem build-out,” said Ryan Rabaglia, global head of trading at digital asset platform OSL.

Other notable gainers in the past 24 hours include AMP (20%), HOT (17%), ENG (16%), OMG (13%), EGLD (12%), AXS (11%), AVAX (9%), and SOL (5%).

Altcoins are hitting new highs while Bitcoin is trading at $61,600, 8% away from its $67k peak last month.

In response to the Fed’s tapering, Bitcoin’s first reaction was a drop to $61,135 from $62,600, only to reverse the move to hit $63,470.

“The correlation of crypto versus equities and risk-on sentiments is high,” said Danny Chong, CEO of decentralized asset tracking platform Tranchess.

“Everyone is expecting a bull run with the absence of negative news. To decide the depth of the move, one should ask what can bring it down?”

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