Fed Raises Rates at Fastest Pace, Bitcoin Rises after Powell’s Remarks

Written by C, Fiona

Last updated: 2022-05-06

Why Trust BTCC

BTCC, a seasoned player in the cryptocurrency sector, has established a solid foundation of credibility through its over a decade of platform operation and profound industry experience. The platform boasts an experienced team of professional analysts who leverage their keen market insights and profound understanding of blockchain technology to offer precise market analyses and investment strategies to users. Furthermore, BTCC adheres to rigorous editorial standards, ensuring that every report and analysis is fact-based, striving for objectivity and fairness, thus providing investors with authoritative insights they can rely on. In the rapidly evolving cryptocurrency market, BTCC stands out as an indispensable partner for numerous investors and enthusiasts due to its stability, professionalism, and forward-thinking approach.

The central bank is taking a tough stance as inflation is at its highest level in four decades. How will this affect Bitcoin?

In a widely anticipated move, the Federal Reserve raised the official U.S. interest rate by half a percentage point, while saying it will reduce the size of its balance sheet by $47.5 billion a month for three months and going up to $95 billion a month starting in September, according to a statement Wednesday from the Federal Open Market Committee.

During a press conference following the decision, Fed chair Jerome Powell also said that “50 basis points should be on the table for the next couple meetings,” and that a 75 basis-point rate hike is not something the committee is considering right now.

The moves come as inflation surges to its highest in four decades, a dynamic that’s being closely tracked by bitcoin (BTC) traders, because the largest cryptocurrency is seen by many as a hedge against rising consumer prices.

“Inflation is much too high and we understand the hardship it is causing,” Jerome Powell said. “We’re moving expeditiously to bring it back down.”

The price of bitcoin rose 2.77% after Powell’s remarks, from $38,716 to $39,790 at press time.

The interest rate on Fed funds, which is what banks charge each other for overnight loans, will go up to a range of between 0.75% and 1%. The Fed had cut the rate to zero in March 2020 to stimulate markets when coronavirus-related lockdowns struck the economy and had held it there until earlier this year. This is the first time the Fed has raised the rate by 0.5% in one meeting since 2000.

“The implications for the U.S. economy are highly uncertain,” the Fed statement reads. “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity.”

Institutional outflows in bitcoin hit an all-time high ahead of the meeting as market participants are waiting for another capitulation before returning to the market, according to Scott Bauer, a former Goldman Sachs trader who’s now CEO of Prosper Trading Academy.

Fed Predictions

In March, Fed officials released quarterly economic projections and a so-called “dot plot” showing that the median expectation for the Fed funds rate at the end of 2022 was for at least seven 25-basis point hikes over the course of 2022, which would push the rate up to 2.8%.

The 50-basis point interest rate hike comes as no surprise since Chair Powell had already hinted at the possibility of a more aggressive rate hike than the usual 25 basis points, or 0.25 percentage point. Investors and traders, however, were waiting for a detailed plan on how quickly and vigorously the central bank would shrink its bond holdings.

Shrinking the amount of Treasury bonds it bought during the pandemic by $35 billion in each of the next three months and $60 billion per month starting in September is a far more aggressive approach than when the Fed reduced its holdings in 2017-2018. Back then, the Fed reduced its balance sheet by roughly $50 billion per month.

The Fed will let up to $17.5 billion of mortgage bonds roll off the balance sheet in each of the next three months, going up to $35 billion a month starting in September, according to a separate statement published by the central bank on its plans.

Reducing the balance sheet aggressively, “if not handled adroitly,” could result in deeper disturbances in the bond market, according to Scott MacDonald, chief economist at Smith’s Research & Gradings. Analysts were closely watching the 10-year Treasury yield, which hit 3% for the first time since 2018 on Monday, as traders prepared for the Fed meeting.

“This is all about regaining the market’s confidence,” MacDonald said. ”The Fed has stumbled and let the horse out of the barn. Now it has to reassure people that inflation is not going to gallop away and the economy plunges into a recession.”

As a result of this hawkish stance by the central bank, fears of a recession have become more tangible, as gross domestic product growth slowed to 1.4% in the first quarter. Two straight quarters of declines in GDP would mean a recession.

Analysts expect Powell to provide guidance on the overall state of the economy at a news conference following the Fed’s policy announcement at 2:30 p.m. ET.