BTC Flat as Federal Reserve Increases Interest Rates

BTC Flat as Federal Reserve Increases Interest Rates

2yr ago

Some policymakers now anticipate that the federal funds rate will be between 1.75% and 2% by December.

BTC Flat as Federal Reserve Increases Interest Rates

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The Federal Reserve has increased interest rates for the first time in 2018 as the U.S. central bank grapples with a potent cocktail of geopolitical tensions, red-hot inflation and the coronavirus pandemic.

Following months of warnings that this move was coming, Chairman Jerome Powell confirmed that the base rate will rise by 0.25 percentage points — and some economists now want the Fed to act more aggressively.

Some policymakers now anticipate that the federal funds rate will be between 1.75% and 2% by December — a figure that could be achieved if similar quarter-percentage-point hikes were introduced at each of the six Fed meetings that are scheduled for between now and the end of 2022.

Fast forward to 2023, and interest rates are expected to rise to 2.8% — increasing the cost of borrowing for households and businesses alike.

All of this comes as the U.S. Consumer Price Index hit 7.9% in February 2022 — the highest seen in 40 years — reducing the spending power of consumers as the price of groceries and gas rise sharply.

This is substantially above the Fed's long-held target that inflation should be 2% — and the cost-of-living crisis is expected to endure for some time yet.

Projections from the Fed suggest inflation will cool to 4.3% by the end of 2022, falling to 2.7% in 2023 and 2.3% in 2024. At a news conference, Powell said:

"The probability of a recession in the next year or so is not particularly elevated. All signs are that this is a strong economy, one that will be able to flourish, not to say withstand, but certainly flourish as well in the face of less accommodative monetary policy."

In other developments, Thursday saw the Bank of England raise interest rates to 0.75% — an increase of 0.25 percentage points — as it warned that inflation could surge to 8% next month, and potentially even higher by the fall.

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The Impact on Bitcoin

Powell's repeated warnings meant that Bitcoin traders had priced in this interest rate hike — and indeed, the world's biggest cryptocurrency has been relatively flat over the past 24 hours.

BTC briefly dipped to lows of $39,566 but quickly rebounded to highs of $41,323, CoinMarketCap data shows. At the time of writing, the digital asset was hovering around the $41,000 mark.

It's worth taking a moment to reflect on how significant a moment this is — especially for Bitcoin. The cryptocurrency was launched in January 2009, born from the ashes of the 2007-08 financial crisis. For most of this time, interest rates have been low or next to nothing, but all this could change in the coming years.

Now 13 years old, there are big question marks over how BTC will react. Some analysts argue that this digital asset has tended to perform well when interest rates are rising in modest increments, while others warn that BTC's short history means there isn't enough data to accurately predict what will happen next.

Of course, there are other factors driving Bitcoin's price too, including the prospect of a clearer regulatory stance emerging from the U.S in the months ahead.

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