- Federal Reserve raised interest rates for the 10th time since last year.
- Fed Chairman Jerome Powell suggested that rates would go even higher if needed.
- Higher interest rates are bad news for high-growth assets like crypto.
The U.S. Federal Reserve has been on a tightening spree, raising the interest rate for the 10th time since last year.
Many investors are concerned about how this move will affect the crypto market, given their sensitivity to changes in interest rates.
Fed Raises Rates for 10th Time Since Last Year
On May 3, 2023, the Federal Open Market Committee (FOMC) announced a 0.25% increase in the target range for the federal funds rate, raising it to 5 to 5-1/4 percent.
The move is a response to the rampant inflation in the US, with prices up 5.0% compared to last year. Core inflation, excluding volatile food and energy prices, reached 5.6% in March.
“My colleagues and I understand the hardship that high inflation is causing,” Fed Chairman Jerome Powell relayed in a statement post the FOMC meeting. “We remain strongly committed to bringing inflation back down to our 2% goal,” he added.
“Without price stability, the economy does not work for anyone,” Powell explained, highlighting the negative effects of rising prices on the poorest members of society. “We are prepared to do more if greater monetary restraint is needed,” Powell promised.
The decision marks the tenth time the Fed has raised interest rates since last year, reflecting the central bank’s efforts to control rampant inflation. In particular, the Fed aims to achieve maximum employment and a 2 percent inflation rate.
Still, the Fed’s attempts at controlling inflation will have knock-on effects on all sectors of the economy, including crypto.
How Fed’s Rate Hikes Impact Crypto
Rate hikes generally impact high-growth assets like technology stocks and cryptocurrencies, hurting their value.
Specifically, higher interest rates make borrowing more expensive for companies and individuals. This leads to a slowdown in economic growth and reduced investments in riskier assets.
Consequently, investors shift their focus from high-growth assets to safer, yield-bearing investments such as bonds and dividend stocks.
Will Crypto Go Down?
Crypto assets, including Bitcoin, have reacted negatively to the Fed’s earlier interest rate hikes. For instance, Bitcoin has been under selling pressure even in anticipation of the latest hike.
Despite crypto’s sensitivity to higher interest rates, the impact of the latest rate hike on the crypto market will likely be limited. This is because the markets already anticipated the move.
Since the rate hike was priced in, the crypto market had likely adjusted to the expected change in monetary policy. This suggests that significant volatility in the crypto market following the Fed’s announcement is less likely.
Still, market participants are closely watching for any signals from the Fed about its future policy decisions.
On the Flipside
- Wall Street and crypto traders are lamenting the Fed’s decision, as keeping the rates where they are would be bullish for their assets.
- While investors grapple with the uncertainty surrounding the Federal Reserve’s interest rate decisions, Bitcoin maximalists are touting Bitcoin as a more predictable monetary alternative.
Why You Should Care
Fed has the power to make and break the market, which is why understanding its position is essential for traders.
The Federal Reserve’s interest rates directly impact the cost of borrowing, which influences the overall investment environment. When interest rates rise, investors tend to gravitate towards safer, yield-bearing assets such as bonds and dividend stocks, as the cost of borrowing increases and riskier assets become less attractive. Consequently, high-growth assets like cryptocurrencies may see a decrease in demand and value.
Bitcoin and other cryptocurrencies have historically reacted negatively to the Fed’s interest rate hikes. As investors become more risk-averse due to higher borrowing costs, they often shift their focus from high-growth assets like cryptocurrencies to more stable and less volatile investments. This can lead to selling pressure and a decline in the value of cryptocurrencies like Bitcoin.
Rising interest rates can hurt crypto in the short term, making riskier investments less attractive. This results in a shift in investor preference towards safer investments and away from high-growth assets like crypto. Consequently, this causes a decrease in demand and potentially lower prices for crypto.
The Federal Reserve cannot directly control cryptocurrencies, as they operate on decentralized networks that are not under the purview of any single institution. However, the Fed’s monetary policy decisions, such as interest rate hikes, can indirectly impact the crypto market by influencing investor sentiment and market dynamics. Additionally, the Fed’s or other agencies’ regulatory actions can affect the crypto market.
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