Fed Announces Biggest Rate Hike In 28 Years: How Will Crypto React?

June 16, 2022 10:48 pm

The Federal Reserve just announced its greatest interest rate hike in 28 years which may signal that an economic recession is likely on the way,

Just as this decision would certainly affect the equity markets, investors this time are paying close attention on how the crypto markets react.

The rate hike is part of the Fed’s strategy to try to bring inflation under control which has affected the entire global economy as well as all financial markets.

Monetary tightening policies are expected to continue and even increase for the rest of the year which brings a bearish outlook.

However, it is during these times where the greatest opportunities present themselves for investors and may be a chance for crypto to prove itself as a new preferred asset class for institutions.

CoinDesk reports:

The U.S. central bank also announced it would continue reducing the size of its balance sheet at the rate announced in May, according to a statement by the Federal Open Market Committee (FOMC), which sets the Fed’s monetary policy.

The Fed Funds rate, the range at which commercial banks can borrow and lend their excess reserves to each other overnight, will rise to a range of 1.5%-1.75%, according to the Fed. Bond traders are pricing in a range of 3.25%-3.5% by the end of the year, implying an unusually rapid and harsh pace of monetary tightening, according to Goldman Sachs.

“The current picture is plain to see,” Federal Reserve Chair Jerome Powell said Wednesday at a press conference after the decision was announced. “The labor market is extremely tight, and inflation is much too high.”

The last time the Fed raised its benchmark rate by 0.75 percentage point was in 1994. Powell said the U.S. central bank will not “declare victory” until officials see “compelling evidence” that inflation is coming down.

At the time of the announcement, Bitcoin was trading at around the $21k mark and experienced a minor rally to around $21.5k after the release of the news.

Some believe that digital assets like Bitcoin will continue to be a long term hedge against inflation due to its limited supply and its reputation as a digital version of gold.

It is still possible that the hike has already been priced in the current market behavior of the crypto industry and that only a longer time frame will reveal whether or not crypto like Bitcoin can preserve wealth during a time where fiat currencies are constantly losing value.

CoinDesk concludes:

But the situation changed after the last Consumer Price Index report showed an acceleration in inflation to 8.6%, rather than a slowdown as expected.

Powell had mentioned at his last conference that if the Fed didn’t see inflation pressures “abating” and “coming down,” the central bank would “consider moving more aggressively.”

Powell said Wednesday that last week’s inflation surprise warranted “strong action at this meeting” rather than waiting another six weeks for the next gathering.

“We decided we needed to go ahead, and so we did,” Powell said. “We came to the view that we’d like to do a little more front-end loading on that.”

In addition to the statement, the Fed published revised quarterly economic projections, or “dot plot,” a pictorial representation of Fed officials’ projections for the central bank’s key short-term interest rate.
Members expect the fund’s rate to go up to 3.4% in 2022 and 3.8% in 2023.

At the time of writing, Bitcoin is priced at $20.6k with the total market cap of the crypto market currently recorded at $897B.

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