The Federal Reserve announced another increase of 75 basis points in interest rates. This increases the fund’s rate to between 3.75 and 4%. The market reacted negatively to the news, with Bitcoin falling 1.4% and Ethereum falling 3.89 %.
The Fed’s funds rate is currently between 3.75 and 4%.
Fed Raises Interest Rates
At Wednesday’s Federal Open Market Committee meeting, the U.S. central bank announced it would raise rates for the sixth time this year, increasing the fund’s rate to 4%.
Before the meeting, the Fed would expectedly maintain its hawkish stance, especially as inflation continues to pose economic challenges. Inflation reached 8.2% in September, indicating that the Federal Reserve’s months-long tightening policy has had minimal effects on preventing steep prices for U.S. consumers.
Fed Chair Jerome Powell warned today that rate hikes will continue until they become “sufficiently restrictive.” The Fed has repeatedly signalled its intent to limit inflation to 2%.
Increasing interest rates is the Fed’s primary tool for combating high inflation rates. As the cost of borrowing money surges when interest rates are high, individuals tend to sell riskier assets and flee to the safety of dollars. The dollar’s strength against other currencies this year can be attributed to the Fed’s interest rate hikes, also the primary cause of the $2 trillion decline in the cryptocurrency market.
The Fed Chair Speaks
In a statement, Powell stated that inflation remained well above the Fed’s 2% target and that the Federal Reserve remained committed to bringing it back down to these levels. Expect additional interest rate increases. Powell stated that they would stay the course until achieving their mission.
The update harmed the markets. The S&P 500 is down 2.5%, the Nasdaq is down 3.39 %, and the Dow Jones is down 1.55% on the day. Bitcoin and Ethereum fell by 1.4% and 3.89%, respectively.
While today’s increase was anticipated, the Fed may ease its tightening policy next month. Economists have predicted a 50-basis-point rise, suggesting the Federal Reserve’s potentially dovish stance. In September, the Fed projected that the funds’ rate would peak at 4.6% in 2023.
Currently, the market is 50/50 on whether December’s decision will yield a 50 or 75-bps increase.
Bitcoin enthusiasts have pondered for a long time when the central bank might alter its stance. The Fed is the most powerful central bank, and its unwavering approach to combating inflation has weighed on crypto prices due to the correlation between digital assets and traditional stocks.
Bitcoin and Ethereum decreased about 70% from their peaks in November 2021, while other assets performed much worse over the past year.
How Fed Pivot Impacts Crypto
Given that the crypto market’s movements depend on the Fed, Paul Tudor Jones and others have suggested that a Fed policy shift could pave the way for a market rally. The hedge fund manager stated last month that a pivot could lead to “a massive rally in a variety of beaten-down inflation trades, including crypto,” but that a recession in 2023 was likely.
Notably, 2022 is an anomaly in the history of cryptocurrencies; up until this point, the asset class has primarily existed during fiscal experimentation, characterised by low-interest rates. A pivot may aid short-term price gains, but it may not be enough to propel the cyclical market to new highs.
Currently, the crypto market is suffering due to the gloomy macroeconomic environment, with prices suppressed and exchange trading volumes at a fraction of their highs in 2022.
The largest crypto event of the year, the Ethereum Merge, failed to generate market momentum in September, mainly due to persistent macroeconomic pressures. Time will tell how the Fed’s plans will affect the notoriously volatile space and whether a pivot will have the desired effect.