Analysts Predict Fed To Raise Rates By 25 Basis Points: What It Means For Crypto

March 21, 2023 1:22 pm Comments

Ever since the start of the banking crisis, Bitcoin and the rest of the crypto industry has rallied by over 40% thanks to its appeal as an alternative banking system and the fact that the crisis may pause the increasing of interest rates.

Increasing interest rates is typically seen as a negative for industries like crypto because it discourages investors to allocate less capital to more volatile assets.

As a result, “riskier” and volatile assets typically do not do as well when interest rates keep on increasing as investors will look to take advantage of the higher rates instead.

The banking crisis has presented a new unique situation where many believe that the Fed will pause the increasing of the rates in order to prevent any more bank collapses.

However, recent data from analysts are now predicting that the Fed will stay strong in its course and may still decide to raise the rate by 25 basis points in the next release.

CoinDesk reports:

Some observers, however, expect the Fed to disappoint popular expectations when it announces its rate policy on Wednesday.

“Our best guess is that the Fed hikes by 25 basis points given continued elevated inflation,” Brian Rudick, senior strategist at crypto trading firm and liquidity provider GSR, told CoinDesk.

A rate hike of a quarter of a percentage point would lift the benchmark borrowing cost to the 4.75%-5% range and may see traders positioned for a pause trim their bullish exposure to bitcoin.

Marc Ostwald, chief economist and global strategist at ADM Investor Services International, said, “The Fed still views the banking sector as being well capitalized, and it will want to stress that the inflation battle is not won, and it remains too high, so a 25 bps hike seems very likely.”

If it turns out that the Fed actually does resume the rate hikes, then it means that the banking crisis might be under control for the most part.

Most investors and speculators seem to believe that the Fed will continue its policy of quantitative tightening despite the recent addition of $300 billion on the Fed’s balance sheet.

Whether or not that will be the only new liquidity injected is still to be seen as any more of that will likely derail the Fed’s efforts to fight inflation.

Understanding the Fed’s short term and long term plan is now key to understanding where Bitcoin and the rest of crypto is within the economic cycle.

Yahoo concludes:

According to GSR’s Rudick, Powell is likely to do a balancing act by striking a dovish tone after raising rates, offering a lifeline to risky assets.

“Powell’s tone is somewhat dependent on the policy action. He will take a more hawkish [pro-tightening] tone to keep inflation expectations in check should the Fed pause or take a more dovish tone should the Fed hike,” Rudick said.

Traders will also pay attention to the bank’s quarterly economic projections.

ADMISI’s Ostwald expects the dot plot – a graphical representation of policymakers’ interest-rate projections – to signal a peak of around 5.37% from 5.125% in December. Ostwald also expects the Fed to raise growth and inflation forecast and revise estimates for the lower jobless rate.

An upward revision of the peak rate forecast might bring some selling pressure to risky assets, considering the market’s expectation for the same has recently declined to 4.8%.

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