Crypto could benefit if Fed steps in to backstop US stock market: Analysts
Analysts say the US stock market's size and scope give policymakers a strong incentive to backstop major drawdowns, which could benefit crypto markets if the Fed steps in to support the $75 trillion equity market.
Intelligence analysis by Llama
The US stock market's size and scope give policymakers a strong incentive to backstop major drawdowns, which could benefit crypto markets if the Fed steps in to support the $75 trillion equity market.
Imagine the US stock market is a big house that lots of people own. If the house starts to fall apart, the government might step in to help fix it. This could make the house more stable and make people feel more confident about investing in it. Crypto markets could also benefit from this because they are connected to the stock market and can be affected by what happens to it.
Analysis
A $60B Vote of Confidence
The US stock market's size and scope give policymakers a strong incentive to backstop major drawdowns, which could benefit crypto markets if the Fed steps in to support the $75 trillion equity market. Analysts say that the Fed may buy equity ETFs to support the stock market, similar to its unprecedented move in 2020 to buy corporate bond ETFs during the COVID-19 pandemic. This move would be a significant departure from the Fed's traditional role and could have far-reaching implications for the financial markets.
Why Crypto Markets Could Benefit
While cryptocurrencies will not receive direct backing from the central bank, their macro pricing remains fundamentally tied to US dollar liquidity, real interest rates, and equity market risk sentiment. Once market participants are convinced that a policy floor effectively underpins risk assets, the risk premium demanded for highly volatile assets will compress. As a result, Bitcoin and mainstream crypto assets are poised to benefit significantly from improving liquidity expectations and a broader revival in risk appetite.
The Road Ahead
The potential for the Fed to backstop the US stock market could have significant implications for crypto markets, particularly if it leads to increased liquidity and a broader revival in risk appetite. However, it is also possible that the Fed may not take such a drastic measure, particularly given the current high levels of inflation. In this scenario, other tools may be deployed to take action, such as rate cuts or balance-sheet expansion.
Key points
- The US stock market's size and scope give policymakers a strong incentive to backstop major drawdowns.
- The Fed may buy equity ETFs to support the stock market, similar to its unprecedented move in 2020.
- Crypto markets could benefit from increased liquidity and a broader revival in risk appetite.
- The potential for the Fed to backstop the US stock market could have significant implications for crypto markets.
If the Fed steps in to support the US stock market, it could lead to increased liquidity and a broader revival in risk appetite, which could benefit crypto markets. This could be a positive development for the crypto industry, particularly if it leads to a medium-to-long-term uptrend.
However, it is also possible that the Fed may not take such a drastic measure, particularly given the current high levels of inflation. In this scenario, other tools may be deployed to take action, such as rate cuts or balance-sheet expansion, which could have negative implications for the financial markets.
