How will the crypto market reprice as traders stop betting on rate cuts and even start "hedging" for rate hikes?

On March 19, Beijing time, the Federal Reserve announced it would keep the federal funds rate unchanged at 3.50%-3.75%, amid global market attention. This marks the second consecutive pause after three consecutive rate cuts by the end of 2025. Beneath the seemingly calm rate decision, undercurrents are surging: as Middle East geopolitical conflicts escalate, causing sharp fluctuations in energy prices, market expectations for Fed monetary policy are undergoing a profound structural reversal. Traders are no longer confident that rate cuts will occur in 2026 and are even beginning to hedge against the risk of rate hikes. How did this shift in expectations happen? What does it mean for the crypto industry?

What structural changes are emerging now?

The core signals from this Fed meeting go far beyond simply “holding rates steady.” The Summary of Economic Projections (SEP) shows the median forecast for the federal funds rate in 2026 at 3.4%, implying that the total easing potential for the year is compressed to just 25 basis points. More notably, the dot plot reveals a change in attitude: among 19 officials, the number advocating no rate cuts in 2026 increased from 4 in December last year to 7.

This shift occurs against a macro backdrop where geopolitical conflicts are once again becoming a central variable in global pricing. Since late February, NYMEX WTI crude futures have risen over 40%, with energy prices soaring and directly boosting inflation expectations. Fed Chair Powell openly acknowledged at the press conference that the committee has even begun discussing the possibility of rate hikes—though this is not the baseline for most officials, the very fact that “rate hikes” are back on the table is a significant policy signal. Market reactions have been more direct: the pricing in interest rate swaps for 2026 has already been reduced from multiple cuts at the start of the year to just one, and this expectation continues to weaken.

What drives this expectation reversal?

Understanding this shift requires unpacking the causal chain behind it. There are two main drivers: energy price shocks and structural changes in the labor market.

First, the transmission mechanism of energy prices. Tensions in the Middle East threaten the security of oil shipments through the Strait of Hormuz, which carries about one-fifth of global oil supply. Rising energy prices not only directly push up overall inflation but also transmit through production costs and transportation expenses to core inflation. Powell explicitly stated that some oil price shocks will be reflected in core inflation. This means that even when excluding energy and food, core PCE inflation is unlikely to be immune.

Second, the “resilience paradox” of the labor market. Although February non-farm payrolls fell significantly below expectations due to weather and strikes, the unemployment rate remained relatively stable, and job openings and layoffs did not worsen. This seemingly contradictory combination—slowing employment but not collapsing, persistent inflation with upside risks—constitutes the most challenging “stagflation” backdrop for monetary policymakers. When the economy faces both slowing growth and rising inflation, the Fed’s balancing act between “keeping employment” and “fighting inflation” becomes exponentially more difficult.

What are the costs of this structural shift?

The drift from “expectations of rate cuts” to “expectations of rate hikes” is not without costs. For the US economy, it means borrowing costs will remain restrictive for a longer period. Higher costs for corporate investment, increased pressure on household mortgages and consumer credit, which will ultimately transmit through demand to economic growth.

For global risk assets, the costs are even more direct. When markets shift from “liquidity easing expectations” to “higher and longer rates” or even “rate hike expectations,” asset valuation denominators face sustained pressure. Data shows that after the Fed’s decision, the S&P 500 experienced its worst performance since 2024 on the day of the rate decision. The systemic decline in risk appetite makes the “loose monetary policy” narrative that previously supported asset rebounds unsustainable.

In the crypto market, these costs are also reflected in subtle shifts in capital flows. Against the backdrop of changing rate expectations, the relative attractiveness of risk-free yields (US Treasuries) rises, while the appeal of high-risk, volatile assets is reassessed. The rapid contraction of leverage in derivatives markets is a direct reflection of waning market risk appetite.

What does this mean for the crypto industry?

The macro narrative shift is reshaping the pricing logic of crypto assets. In the short term, mainstream crypto assets like Bitcoin are increasingly correlated with traditional risk assets such as the Nasdaq and S&P 500. After the March 19 Fed decision, Bitcoin briefly plunged over 4.6% to around $71,000, with Ethereum dropping more than 6%. This synchronized volatility indicates that crypto assets are still embedded within the broader macro asset pricing framework.

However, the medium-term landscape may be more complex. On one hand, if “higher for longer” rates or even rate hikes materialize, liquidity conditions will remain tight, which is unfavorable for all risk assets. On the other hand, narratives within crypto are diverging: Bitcoin, after falling below $70,000, quickly rebounded, showing clear psychological support and buy interest at that level. Although institutional funds via spot ETFs saw net outflows after the decision, the overall inflow trend has not reversed entirely. This suggests a “macro suppression versus micro-structural improvement” tug-of-war that will likely dominate the next phase of the market.

How might this evolve in the future?

The future trajectory of interest rates depends on the interaction of several key variables. The most critical is the duration of the Middle East conflict. If the conflict is contained quickly, energy prices may fall back, and inflation pressures could be temporary, allowing the Fed to possibly cut rates in the second half of 2026. But if the conflict escalates, with widespread attacks on energy infrastructure, Brent crude could rise to $120 per barrel or higher. In such a scenario, “rate hikes” shift from discussion to reality.

Another possible path is a “deepening stagflation.” Institutions like China International Capital Corporation (CICC) suggest the US may be entering a phase of slowing growth combined with persistent inflation. In this environment, the Fed’s options are limited: raising rates could deepen growth slowdown, while cutting rates could fuel inflation. Ultimately, the outcome may be that interest rates stay at current levels longer, leading markets to a prolonged period of watchful waiting and adjustment.

Potential risks to watch out for

In the context of expectations shifting from “rate cuts” to “rate hikes,” several risks merit close attention:

1. Mismatch between market expectations and central bank intentions. The dot plot shows a single rate cut in 2026, but whether this will materialize remains uncertain. If inflation data continues to surprise on the upside, the Fed may be forced to adopt a more hawkish stance, triggering a re-pricing of expectations.

2. Liquidity turning point triggering chain reactions. Major central banks globally are shifting toward caution, reversing the loose liquidity environment that supported asset prices in recent years. For crypto, which relies heavily on continuous capital inflows, this could lead to a systemic downward adjustment in valuation levels.

3. “Bull trap” technical risks. Amid macro suppression and micro positive signals (such as ETF inflows and ecosystem developments), markets may experience false breakouts. Some on-chain analysts warn that current market structures resemble a “bull trap”—short-term rebounds that could be followed by deeper corrections.

Summary

The reversal of rate expectations signals a fundamental change in the macro environment for crypto assets. From “expecting rate cuts” to “hedging against rate hikes,” the market’s narrative is undergoing a profound reshuffle. For crypto investors, understanding this macro shift is more important than speculating on short-term price movements. In a context of “higher for longer” rates and the potential return of rate hike fears, asset allocation must focus more on risk management—valuation models relying on loose monetary policy assumptions may need recalibration.