The Federal Reserve increased its interest rates by 25 basis points, marking the tenth rate hike in just over a year. Despite concerns over economic growth and the banking crisis in the United States, the Fed’s chairman indicated that more stringent monetary policy measures are necessary to address inflation which is still considerably higher than the Fed’s target of 2%. However, the Fed also indicated that it may pause further interest rate increases if the economic data indicates a slowdown in inflation or any other factors that may warrant a shift in monetary policy.
On May 3rd the Federal Reserve approved its tenth interest rate hike and gave a hesitant indication that the current tightening cycle was coming to a close.
The markets, however, are more concerned on whether the Fed would pause its rate hikes in the next FOMC meeting, particularly with lingering fears over economic growth and a banking crisis.
The Federal Reserve Chair has indicated that although inflation has declined from almost double-digit figures seen a year ago to approximately 5%, it still remains considerably higher than the Fed’s target of 2%. This implies that more stringent monetary policy measures are required to address the situation.
Federal Funds Rate
The fed funds rate was increased by 25 basis points to the anticipated range of 5%-5.25% as the Federal Reserve’s FOMC continued its over-a-year-long trend of rate increases. This is the highest fed funds rate since 2006-2007.
The interest rate at which banks lend and borrow funds from one another overnight to meet their reserve requirements is known as the federal funds rate. To stabilize the economy and manage the money supply, the Federal Reserve sets a target for this rate. By adjusting the federal funds rate, the Fed can impact other interest rates in the economy, including credit card rates and mortgage rates.
If the goal of the Fed is to boost economic growth, it may decrease the federal funds rate to reduce borrowing costs and prompt people to spend more. On the other hand, if the Fed wants to curb an economy that is overheating, it may increase the federal funds rate to increase borrowing costs and restrict spending.
Banking crisis continues
Due to the recent increase in several uncertainties, including concerns about a recession, the debt ceiling, problems at regional banks, and a negative speculative atmosphere surrounding banking stocks, there has been a strengthening of dovish expectations.
However, despite the recent banking crisis that resulted in the failure of three banks since mid-March, Federal Reserve Chair Jerome Powell commented that the state of the banking industry has, on the whole, improved.
Specifically, he mentioned that the most recent bank to fail was First Republic Bank. Despite this, Powell emphasized that the banking system in the US is still sound and resilient.
He also mentioned the Fed’s report on Silicon Valley Bank and the need to address rules and supervisory practices to avoid further bank failures. The statements from Powell signal that the Federal Reserve is monitoring the situation closely and may take steps to limit any risks to the banking industry.
In the immediate aftermath of the revelation, there was no discernible change to the price of Bitcoin (BTC), which was trading at about $28,600 at the time.
Bitcoin’s value went through a period of significant volatility last week due to the anticipation of a 25 bps rate hike by the FOMC during their meeting. The price fluctuated between $27,000 and a multi-day peak of $30,000.
The Fed’s next move
At the time of writing, the financial markets are presently pricing in an 87.4% possibility that the Federal Reserve would suspend its rate hikes and retain its current fed funds target range in June, according to CME Group.
On the other hand, investors and central bankers have approximately six weeks’ worth of economic data between now and then to analyze, all of which might have a substantial impact on monetary policy.
The Federal Reserve’s decision to raise interest rates by 25 basis points and increase the federal funds rate to 5%-5.25% has garnered much attention from the financial markets.
The Fed’s next move will be closely watched by investors and economists alike, as the financial markets price in a potential suspension of rate hikes in the upcoming June meeting. The decision will be influenced by upcoming economic data, which may have a substantial impact on monetary policy.
Rickie Sanchez is an article writer specializing in cryptocurrency news. Since late 2017, he has been actively investing in cryptocurrencies. He is enthusiastic about everything that has to do with crypto and he hopes that the readers of his articles in the years to come will gain a massive understanding of blockchain technology.