The new year hangover was shaken-off last week by an abrupt monetary policy u-turn by Jerome Powell during the Fed’s first meeting of 2022.

Markets tumbled as panic around the unexpected shift from quantitative easing to aggressive quantitative tightening drove the NASDAQ, S&P 500, and Dow Jones to the worst lows since 2020 in cascading price action.

Wall Street had been expecting a continuation of the Fed’s November signalling of a gentle transition that would apply the brakes and slow asset purchases by mid-2022 before rate hikes later in the year.

Instead, a Federal Reserve plagued by un-curtailed inflation and tightening labour markets reacted with a sudden announcement of a double-fisted series of rate hikes and an expedited shrinking of the federal balance sheet that could see asset purchases end by March.

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Needless to say – all seats are on edge for Fed Chief Powell’s comments tomorrow at 2:30pm EST (7.30pm UK), which will clarify the timeline and ferocity of the planned rate hikes and quantitative tightening package. All ears will be listening for any sign of dovish sentiment.

The last instance of quantitative tightening by the Fed was in 2018 and quickly created a bear market across most assets classes, tightening was eventually halted once the markets hit a pain threshold – but many wonder what this threshold might be for Powell in face of wild inflation and a potential conflict in Ukraine.

How will crypto markets react to Powell?

Following the ‘extreme fear’-induced sell-off across the board last week, which saw $400bn knocked-off the total crypto market cap, Monday saw a remarkable glimmer of hope, with investors rallying to scalp their favourite crypto assets in face of mounting indications of overselling.

Markets have carried over considerable strength into today with Bitcoin remaining steadfast above $36,000 (safely away from the capitulation territory of Asian traders Monday morning).

A crypto recovery while equities battle volatility has proven reassuring following widespread concern about Bitcoin’s price action becoming tethered to movements in the stock market.

Tomorrow will likely prove to be judgement day for the near future of price action; an uptick in equities in response to a softening Fed could be the catalyst needed to push Bitcoin back above the critical $40,000 level.

A dovish Fed could see the bull run resume with a gradual tightening against a solid economic and earnings backdrop potentially charting a steady course away from inflation – something that markets have historically responded very favourably towards.

But there are genuine reasons to be concerned, not least of all the fall in US Futures markets today – a palpable manifestation of the uncertainty around Powell’s statement tomorrow.

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