On Wednesday, the Federal Reserve issued its latest interest rate increase in response to inflation. Federal funds rates have been hiked up to a target of 4.5%.
Surprisingly, the Fed’s projections for the duration and value of interest rates may be higher than predicted. Almost all board members estimate that an interest rate slightly above 5% will be appropriate for next year, even as far as Q4.
The S&P 500 closed -0.61% lower on the day. Bitcoin closed flat but did slump by as much as 1% during Asian hours. For a brief moment on Wednesday, bitcoin appeared to be rallying. It surpassed a value of $18,000 for the first time since the FTX meltdown over a month prior. Following the Federal Reserve’s news of an interest rate hike, bitcoin’s price went back down to around $17,800. At press time, bitcoin trades for $17,700.
chair of the Federal Reserve Jerome Powell has said that no one knows if a recession is on the cards, but at the same time, the Fed has come out more hawkish than expected. The Fed’s announcement appeared to have a negative effect on stocks and bitcoin. As things stand, a hawkish Fed may cause the markets to sell in the short term.
Bitcoin, and crypto in general, thrive under loose monetary and financial conditions. Bull runs tend to occur during negative-interest rates when less-than-sound business ideas are easily funded. Several immediate systematic risks prevail in the crypto-market, such as the potential failure of crypto behemoth Digital Currency Group (DCG) and Grayscale, or the crisis experienced by bitcoin miners.
So, are prolonged and higher interest rates a new critical blow for bitcoin and crypto?
Fed believes in max pain for max gain
At a press conference on Wednesday, Powell laid out the Fed’s philosophy behind its projections. The Fed isn’t convinced that inflation is easing as expected, despite a lower-than-anticipated consumer price index (CPI) reading this week.
The Fed needs consistent lower inflation readings in order to ascertain that inflation is decreasing. Its inflation target is 2% but the Fed is projecting an inflation rate higher than 3% for next year.
Powell was very clear on the Fed’s aims. It needs to tighten monetary policy as much as it can so that it can ease-off inflationary pressures as fast as possible. Failing to act quickly, according to Powell, would result in higher inflation and prolonged economic decline. In simple words, taking the medicine today would help us get better quicker.
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The Federal Reserve’s next meeting is in February, by which time it’s possible that inflation has eased enough to turn its outlook dovish. If inflation doesn’t ease, we may stay in a higher interest rate environment for longer.
So far, Ethereum has held very strongly in this bear market in contrast to many other tokens. Only, the crypto industry has a long list of problems that need to be addressed, separate to other financial markets. We may very well see crypto markets continue to decline as we close off the year.