For the first time since December 2018, the U.S Federal Reserve decided it will raise the fed-funds rate by 25 basis points. At the Federal Open Markets Committee meeting this Wednesday, Fed addressed the concern of inflation following the Ukraine crisis, and lifting the benchmark interest rate is considered a way for the central bank to regulate the market.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures,” according to a press release from the Fed. “The implications for the U.S economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
According to Jerome Powell, Fed Chairman, Fed is also expecting to reduce its balance sheet as soon as May.
This decision to raise the interest rate came after the Consumer Price Index (CPI) was shown to reach 0.8% this February, equivalent to 8% over the past 12 months, the highest level since 1982. A fresh four-decade high indeed. The U.S. Labor Department also reported a 10% increase in the Producer Price Index (PPI) this Tuesday. And what’s worse is that, many economists speculate that the inflation rate hasn’t peaked yet.
With the latest announcement from the Fed, it seems like the U.S. central bank will continue to implement tighter monetary policies to curb inflation. As soon as Fed’s statement was published, Bitcoin’s price took a hit.
“I’d say that the market is not going to react to the rate hike but will likely react very sharply to anything said in the statement or more likely, the press conference, that indicates a change in the quantitative easing exit schedule or the start of quantitative tightening,” said Bob Iaccino – chief strategist at Path Trading Partners and co-portfolio manager of Stock Think Tank.
“Equity markets do not tend to suffer all that often or all that much, during rate-hike cycles, [and] since the bitcoin/Nasdaq correlation is still holding very strong, I would expect the same thing for cryptocurrencies in general,” Iaccino claimed.
Bitcoin (BTC) market saw a quick rise and fall following the announcement from Fed. The cryptocurrency jumped from $39,120 to $41,700 then fell back to under $40,000 in just a few hours.
Traders are now closely watching Fed’s plans in the coming months, waiting to see if their comments would be “dovish” or “hawkish”, or in a more simpler term, if their policies would be cautious or more aggressive. According to CME FedWatch Tool, the market is expecting an increase of 25 to 50 basis point from the Fed after its meeting in May. If this scenario happens, the interest rate could go as high as 1%.
In conjunction with the policy statement, the Fed also released a set of quarterly economic projects, underscoring the potential for a prolonged series of interest rate hikes in the near future.
It seems like there will be seven 25-basis point hikes in 2022, which will lift the federal funds rate to 2.8%, roughly 100 basis points higher than our expectations 3 months ago.
Fed’s committee members also forecast a slowdown in the growth of the gross domestic product growth. They give an estimate of 2.8% growth, down from the 4% growth they suggested in December.
