Market expectations for the Fed’s interest rate trajectory are now in line with the central bank’s ‘dot plot’, after being in sharp divergence in recent years. With the market pricing in an FOMC rate hike with almost certainty, the Fed’s credibility is on the line. Can the Fed maintain its credibility?
While we think that its third rate hike in the current cycle is long overdue, the stark change in rhetoric from Fed officials is surprising. Market pricing of a potential rate hike at next week’s FOMC meeting moved from 30% to over 90% in just three days after several hawkish speeches from Fed Board members, including Chair Yellen and Vice Chair Fischer. The real concern, however, that the Fed should have is the loss of credibility if it does not act after its hawkish commentary.
We remain unconvinced about the Fed’s voracity to hike rates aggressively as required as it has talked tough before and then not acted. Indeed, three rate hikes is only in line with market expectations and the Fed is only now regaining credibility, according to the Overnight Indexed Swap (OIS) market.
Although the US economic recovery remains robust, with the jobless rate now below pre-crisis levels, there are some indications that suggest that the Fed may not reach the three expected rate hikes. There is significant political uncertainty in Europe, which was a concern for the Fed in 2016 after the EU Referendum in the UK, and the US Dollar remains strong –another concern for the Fed in recent years. Meanwhile, the Bloomberg Financial Conditions Index shows that financial conditions in the US have tightened to the highest level in over two years.
Meanwhile, the anticipated USD strength after Fed commentary has not transpired. We feel that the risk is skewed to the downside for the dollar if/when the Fed hikes rates in March given recent moves and elevated investor positioning. We expect the USD to rebound if the Fed become more proactive and raise rates more quickly-than-anticipated in H2 2017.
Martin Arnold, Global FX & Commodity Strategist at ETF Securities
Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.
Last week was monumental for Bitcoin and the broader crypto ecosystem, ushering in key regulatory and legislative developments in the US. These changes not only underscore a shifting attitude toward digital assets in the US but also lay the groundwork for greater clarity and legitimacy for crypto globally in the years to come. Following are the five reasons we think last week was such a defining moment for crypto assets and why we think the current environment is setting this asset class up for a remarkable 2025.
A paradigm shift at the SEC
One of the most significant signals of change came from US Securities and Exchange Commission (SEC) Acting Chair Mark Uyeda, who announced the establishment of a Crypto Task Force led by Commissioner Hester Peirce, affectionately known as ”Crypto Mom” for her engagement in the digital asset space while at the SEC. The task force, along with the favorable views on digital assets from incoming chair Paul Atkins, reflects an important step toward ending the contentious practice of ”regulation by enforcement,” which has long stymied innovation for crypto entrepreneurs and limited opportunity for US investors.
The SEC’s subsequent decision to rescind Staff Accounting Bulletin (SAB) 121, which imposed restrictive accounting guidelines on banks wishing to custody crypto, further underscores the regulatory shift. Its repeal not only provides operational relief but also signals a more pragmatic approach to crypto oversight.
These regulatory moves reflect a broader recognition by US authorities of the need for a framework that fosters innovation while ensuring investor protection. They set the stage for a future where digital assets are more seamlessly integrated into the financial system.
New congressional leadership
Another pivotal development was the appointment of Senator Cynthia Lummis as chair of the newly created Subcommittee on Digital Assets. Lummis, a long-time advocate for Bitcoin and blockchain technology, is uniquely positioned to champion legislation that promotes innovation while addressing key concerns around market integrity and consumer protection.
Her leadership comes at a critical time, as Congress considers landmark legislation such as the Stablecoin Act and the Bitcoin Act. The Stablecoin Act, which could see approval this year, aims to establish clear guidelines for stablecoin issuance and use. Meanwhile, the Bitcoin Act proposes an audacious goal: for the US government to accumulate 5% of bitcoin’s total supply. There are obstacles to this proposal, some of which I noted in August last year, but if enacted, this legislation could significantly impact Bitcoin’s global adoption and price trajectory.
A game-changing executive order
The White House also contributed to the week’s momentum with a new executive order aimed at shaping the future of digital assets in the US. A key aspect of this order is its rejection of a Central Bank Digital Currency (CBDC) in favor of fostering stablecoin development. President Trump has been vocal about his preference for implementing a ”digital dollar” on top of open blockchain networks, a move that aligns with crypto’s decentralized ethos.
This executive order also signals the end of ”Operation Chokepoint,” an informal campaign that had effectively debanked parts of the crypto industry. By reaffirming the importance of open networks and stablecoins, the administration is providing a clear direction for the role digital assets could play in the US financial system.
Perhaps the most intriguing development is the proposal to establish a government stockpile of digital assets. While the term “stockpile” has been carefully chosen over “reserve” to avoid direct comparisons with traditional currency reserves, the implications are nonetheless profound. The working group tasked with studying this proposal has expanded its scope beyond bitcoin to include crypto assets more broadly.
While it’s too early to predict how or whether the stockpile will be established, the study represents a thoughtful approach to a high-stakes decision. It could mark the beginning of a global trend, with other nations potentially racing to stockpile crypto assets as part of their sovereign holdings, which we’ve already seen this week with the Czech central bank.
Steps toward a comprehensive regulatory framework
The week’s developments also highlight the ongoing evolution of regulatory characterization. US regulators are moving toward a more nuanced understanding of digital assets, which is essential for crafting effective policies. This trend was echoed in the revocation of SAB 121 and the growing momentum behind legislation like the Stablecoin Act. Additionally, the broader regulatory framework for market structure in digital assets, which could happen this year or next, will likely address issues ranging from trading practices to asset classification. These steps indicate a deliberate effort to integrate crypto into the financial system with precision and clarity.
The start of a geopolitical race to embrace crypto
These developments, particularly the possibility of a US crypto stockpile, also raises the stakes on the global stage. Sovereign states accumulating crypto assets could lead to a new form of economic competition, where digital assets play a central role in national strategy.
The US government’s interest in studying this proposal reflects an understanding of crypto’s growing significance in global finance. It also aligns with the nation’s broader goals of maintaining technological and economic leadership.
What’s next?
The developments of the past week are part of a broader trend of increasing institutional and governmental recognition of crypto’s potential. However, several key milestones remain on the horizon:
• Stablecoin Act Approval: This legislation, which could happen before the fourth quarter this year, will provide much-needed clarity for stablecoin issuers and users.
• Market Structure Framework: Expected by 2026, this framework will define the rules of engagement for trading and investing in digital assets.
• Bitcoin Act Progress: If the US government begins accumulating bitcoin, it could have profound implications for the asset’s supply dynamics and global adoption.
• Stockpile Study Results: The findings of the crypto stockpile working group could shape the long-term digital asset strategy in the US.
As these milestones approach, bitcoin and other crypto assets are likely to experience heightened volatility, but also greater legitimacy. Investors, policymakers, and innovators will continue to pay attention to these developments, as they could define the future of the global economy. While challenges remain, the direction is clear: crypto is moving from the fringes of finance to center stage. As these changes unfold, the crypto ecosystem is poised to evolve into a more robust and integral part of the global economy, presenting investors with attractive opportunities to get broad exposure to this emerging asset class.