After last year’s global energy crisis and high inflation, bitcoin has made a spectacular rally of 67% in 2023 at press time, bouncing back alongside stock markets. Now, traders and investors are awaiting the US Federal Reserve’s meeting on Wednesday, which will provide crucial clarity on the future of interest rates.
Broad consensus predicts the Fed will raise rates in the next meeting by 25 basis points – bringing the interest rate to 5%. But this year’s rally has been partly driven by a forecast that the Federal Reserve will pivot and eventually start cutting interest rates later this year.
Fed chair Jerome Powell has consistently stressed that in order to tame inflation, a “higher for longer” rates regime is needed. The Fed isn’t keen on repeating the mistake of lowering rates early, the 70-year-old has said on several occasions, insisting that the labor market still needs to cool off in order to bring inflation down to its 2% target.
The Federal Reserve is using a traditional macroeconomic handbook in order to calibrate interest rates. Its aggressive rate hikes rates have recently been criticized by various senators and members of congress, notably Senator Elizabeth Warren, who argues that the Fed should find alternatives to bringing down inflation that don’t involve forcing people out of their jobs.
Price indexes and unemployment rate, metrics used by the Fed to calculate inflation, indicate that it’s winding down:
- The Consumer Price Index for March was as low as 0.1%; energy prices significantly dropped over 6% year-on-year while necessities like food and shelter had increased in price by 5.6%.
- The Producer Price Index, a more favorable metric for the Fed to calculate inflation, was down 0.5% in March but up almost 3% in the past year.
- Meanwhile, the unemployment rate for March remained low at 3.5%.
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The Fed acknowledges that inflation seems to be going down and peaked last year. At the same time, it doesn’t want to risk encouraging higher bouts of inflation with premature interest rate decreases. It appears likely that the Fed will maintain its “higher for longer” position, disappointing those who are expecting hints of a pivot in this meeting.