The US central bank is balancing its fight against rising inflation with recent turmoil in the banking sector.
- In Brief
The Federal Reserve raised interest rates to a target range of 4.75% to 5% to combat inflation, triggering a surge in cryptocurrency prices, including Bitcoin and Ethereum.
- The Fed had previously warned that interest rates could be higher than expected.
- The measures taken by the Fed to ensure stability and avoid uncertainty may not be enough, as there are still concerns about the banking sector.
The Federal Reserve announced a quarter percentage point (25 basis points) interest rate hike on Wednesday, continuing its campaign to quell inflation despite two of the largest bank failures in U.S. history in the past two weeks, causing mixed reactions in the price of Bitcoin and the rest of the cryptocurrency market.
The Fed raised interest rates to a target range of between 4.75% and 5%, reflecting the expectations of Fed futures markets, which had calculated an 88% chance of a quarter-point rate hike, according to CME’s FedWatch tool.
Cryptocurrency prices surged immediately after the announcement, boosting Bitcoin to $28,800, up 2.2% from the previous day, according to CoinGecko. Ethereum topped $1,800. Both BTC and ETH have wobbled in the half hour since, with shares also flat.
Fed Chairman Jerome Powell had said earlier this month that interest rates may have to go “higher than previously anticipated,” citing stronger-than-expected economic data during remarks before Congress.
But expectations of future rate hikes by the Fed shifted as signs of stress in the U.S. banking sector emerged, indicating that the Fed may lift its foot off the brake following the closures of Silvergate Bank, Silicon Valley Bank and Signature Bank that began on March 8.
The Fed, the Treasury Department and the Federal Deposit Insurance Corporation stepped in to calm uncertainty and prevent contagion by guaranteeing SVB and Signature’s deposits on March 12. The U.S. central bank also began offering banks loans to help them weather any potential liquidity problems.
Whether the measures are enough to prevent further turbulence among banks is unknown, following the forced sale of Credit Suisse to UBS on Sunday and questions surrounding First Republic Bank, whose shares have plunged more than 87% since the start of March.
Any hint that the Fed will stop raising interest rates or consider cutting them is positive for digital assets, Dean Kim, head of research at William O’Neil + Co. told Decrypt. On the other hand, cryptocurrencies could suffer if the Fed remains determined to keep interest rates high or push them even higher.
“We have been very bullish on Bitcoin and Ethereum, given the fact that we think the rate hike cycle is about to end,” he said. “The Fed will have to start cutting in the future.”
The Fed began raising interest rates a year ago, when it raised them from near zero last March. Since then, it has pulled rates aggressively to their highest levels since 2007.
Last year, it raised rates four times in a row, 75 basis points, and then cut them to 50 basis points last December. In January, the central bank slowed its pace of hikes to 25 basis points, but insisted that the road ahead would be “bumpy” and that inflation is not yet under control.
Although inflation has shown signs of steadily declining since its peak of 9.1% last June – the highest reading in more than 40 years – February’s measured inflation of 6% is still well above the Fed’s 2% annual target.
By raising interest rates and making borrowing more expensive for businesses and consumers, the Fed has progressively cooled the U.S. economy to curb rising prices. But as it tightens, the Fed risks triggering a recession if it raises rates too much or too fast.
Digital asset prices have been battered as the Fed raises interest rates, making risk assets like stocks and cryptocurrencies less attractive than more conservative ones like U.S. Treasuries, which have less upside potential but offer guaranteed government-backed yields.
Since the collapse of Silicon Valley Bank, Bitcoin has rallied 44.5% to $28,800 from about $19,900 and Ethereum is up 26% to $1,800 from about $1,400, according to CoinGecko while the market capitalization of all cryptocurrencies has risen from $964 billion to $1.23 trillion, up 27.5% since March 10.
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