How FOMC Announcements Affect the Price of Bitcoin
Daily and intraday price data is used to assess the impact of FOMC announcements on the returns and volatility of Bitcoin.
The interest rate decisions, monetary policy statements and press conferences held by the Federal Open Market Committee (FOMC) are one of the most important events in global markets. These events usually have a high impact on many assets, especially USD currency pairs, gold and oil. While bitcoin (BTC) is still a relatively small market it has often exhibited reactions to the actions of the FOMC.
In this article, we look at the impact of FOMC monetary policy announcements and press conferences on the price action of BTC-USD since 2015. Daily price data from the Bitcoin Liquid Index is used to examine the impact of FOMC statements/press conferences on BTC-USD by calculating abnormal returns and volatility, as well as the 7-day abnormal return after these events. Bitcoin’s 1-hour price data from Bitstamp is also used to assess the impact on returns and volatility.
The federal funds rate is the main tool of the Federal Reserve which is used to achieve its goal of 2% inflation and maximum employment. Most central banks have been independent of the government (althought accountable) to ensure the integrity of monetary policy. The federal funds rate sets a benchmark for the interest rates that banks use to lend to each other and therefore influence economic activity.
Another tool of the Fed — quantitative easing — involves the buying up of treasuries and mortgage-backed securities, taken onto the balance sheet of the central bank. Tools like quantitative easing were introduced as interest rates approached the lower zero bound after the Global Financial Crisis. The chart below of the fed funds rate and the total assets on the Fed’s balance sheet since 2015 shows distinct periods of monetary policy easing and tightening:
The base interest rates in the US remained stable for most of 2015, which was then increased in December 2015. There was another rate hike in late 2016 followed by a series of successive hikes in the years 2017–2019. The fed funds rate reached a high of 2.50% before being the Fed started to ease once again in July 2019. More recently, emergency rate cuts brought the base interest rate to near zero again as COVID-19 weighed on markets.
Changes in monetary policy affects financial markets through the monetary transmission mechanism — asset prices are influenced through the expectations set by the FOMC and money market interest rates. When the interest rate is decreased or unconventional policies are used, investors are incentivised to shift away from bonds and other interest-rate linked instruments and add more assets like stocks, gold or bitcoin to earn higher returns.
Since the yield on dollar-denominated assets are relatively lower when the FOMC decides to reduce interest rates, investors seek returns elsewhere. As a result, there’s a greater demand for a stocks, cryptocurrencies or any other real financial asset priced in dollars — and higher demand usually translates into a higher price.
What is said during the interest rate statement says is also important as expectations play a major role in financial markets . The first part of the FOMC press conference is a prepared statement, which usually begins at 18:00/19:00 UTC. The second half is the press conference, where the Fed chair takes questions — and the responses often cause volatility in financial markets. The dates of all upcoming and past FOMC press conferences can be found here. The next statement/press conference will take place on September 16, 2020 at 19:00 UTC.
Daily Returns for BTC-USD, Days of FOMC Statements
The abnormal daily returns for BTC-USD for each FOMC statement/press conference since June 2014 are shown below. Abnormal returns are calculated simply as the difference between the daily return and the average daily return over the entire sample:
The top 10 percent of all daily abnormal returns in the sample are above approximately +4%, while the bottom 10 percent are all below -4%. Major decisions of the FOMC are annotated on the chart while many of these events corresponding with a daily abnormal returns that are in the lower/higher end of the distribution.
Weekly Returns for BTC-USD after FOMC Statements
The 7-day abnormal returns for BTC-USD after each FOMC statement/press conference are illustrated below:
The largest, positive weekly abnormal return occured after the FOMC statement indicated in June 2019 it not will cut the fed funds rate until 2020. BTC-USD’s abnormal return for the following week exceeded +22.5%. However, the FOMC backtracked the next month in July 2019 and cut the fed funds rate by 0.25%. Bitcoin enjoyed an abnormal return of approximately +11%.
More recently, BTC-USD responded negatively in the week following the first emergency rate cut on March 3, 2020. However, the digital asset enjoyed an abnormal return of almost 15% in the week after the second emergency rate cut on March 15, 2020.
Hourly BTC-USD Returns
To look at the impact of FOMC statements/press conferences on BTC-USD’s price action at the intraday level, hourly price data since January 2019 is used to calculate the average abnormal returns. A 6-hour window is used around each FOMC statement since January 2019 up until June 2020.
The average abnormal return is almost +1.20% for the hourly trading session prior to the FOMC statement and press conference. The average abnormal return during the hour of the statement/press conference itself is negative, almost -0.90%. All other hours have abnormal returns very close to zero.
The results in the chart are highly influenced by the sharp movements seen in BTC-USD during the emergency announcement/interest rate cut on March 3. When removing the data for this FOMC statement, the trading session 2 hours prior to the FOMC press conference displays the highest average abnormal return — in the top 20% of all 13,815 observations.
The cumulative average abnormal return also allow us to examine the impact of FOMC statements on bitcoin’s price action. Cumulative average returns are calculated by summing the abnormal returns for each event window and then averaged for each hourly trading session:
The cumulative average abnormal return peaks 1 hour before the event, and is significantly different from zero in all hours (+1 to +6) after FOMC statements since 2019.
Average Hourly Volatility Around FOMC Announcements
The chart below shows a similar pattern for the average abnormal volatility around FOMC statements/press conferences:
Bitcoin’s price volatility has usually been higher in the hourly trading session before the FOMC announcements and during the hour of the event itself.
Summary
Since mid-2014, bitcoin’s price has often exhibited reactions to FOMC statements/press conferences, especially with major chages in interest rates and monetary policy. We’ve presented some evidence that the FOMC announcements have a short-term effect on daily returns that are in line with what is expected.
When the FOMC has been dovish or cut rates — the daily abnormal return has been positive. When the FOMC has been hawkish or increased rates, the daily abnormal return on that day is usually negative. Although not every rate cut ( or hike) is associated with a unsually high (or low) return.There’s some evidence for longer-term effects as well, given that weekly abnormal returns have been positive on the easing of monetary policy. But the impact is not always in the expected direction.
For intraday data, bitcoin has tended to display high abnormal volatility in the hour before the FOMC statement/press conference, as well as during the hour of the event. Average abnormal returns are positive in the hour leading up to the FOMC statement but negative during the event. The cumulative average abnormal returns are significantly different from zero, especially in the 6 hours after the FOMC statement, suggesting that the event does have an impact on bitcoin returns and that traders should be paying close attention in the hour leading up to the event to quickly digest the statement/press conference and trade BTC-USD accordingly.
Looking Ahead
The next FOMC meeting takes place on September 15–16, 2020. The Fed is now committed to keeping interest rates as close to zero for as long as possible, into 2022 and perhaps even beyond. While that may make it difficult to predict the next FOMC statement/press conference that will impact the price of bitcoin like we saw in March 2020, there are some things to watch out for:
- In the most recent statement in July 2020, the FOMC stated, “the path of the economy will depend significantly on the course of the virus”. COVID-19 has been a major driver markets in 2020 and any announcements by the FOMC hinting at further expansion of unconventional monetary policy to manage a second peak is likely induce high volatility for BTC-USD.
- Relaxation of the 2% inflation target to accomodate the economic recovery. Traders should be on the lookout for a change in statement’s language — specifically, a shift away from full employment as a goal and a focus on inflation targeting. The FOMC statement may explicitly state it wants to see inflation above 2% before it acts to raise rates — which may strengthen the perception of bitcoin as a safe haven, especially if the market thinks there’s a risk they will overshoot this target.
The prospect of higher inflation in the near future favours bitcoin. At the same time, the crypto-asset is becoming recognised by institutional investors as an insurance policy for the current state of economic affairs. While the price of bitcoin was mainly driven for many years by internal events, macroeconomic events are becoming important, with the leading cryptocurrency increasingly assuming the role of a barometer of the state of the global economy.
Disclaimer: This blog article should not be taken as financial or investment advice.
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