Last Wednesday, the Federal Reserve declared an increase in the federal funds rate, raising it between 5% and 5.25%. This marks the first time since 2007 that the rate has been raised by 25 basis points. Although the Fed hike was widely anticipated, it was announced amid a series of bank failures that have occurred in recent months, raising doubts about the stability of the banking system and significant movement in Bitcoin (BTC) values.
Banking Sector Collapses
During the recent months, several banks including First Republic and Silicon Valley Bank had to be taken over by regulators. Meanwhile, Signature and Silvergate had to be liquidated voluntarily due to their exposure to cryptocurrencies.
JPMorgan had to intervene and buy First Republic, while Silicon Valley Bank was seized after comments from its CEO triggered a bank run. Despite timing the Fed hike during these events, the Federal Reserve has been monitoring the situation closely, with its chairman Jerome Powell assuring that the banking system remains “sound and resilient”.
Inflation Concerns Amid the Fed Hike
The Federal Reserve aims to maintain a 2% inflation target rate, which is also the target rate for fed funds. Although inflation is showing signs of slowing down, it remains at a high level to this point.
According to the consumer price index, annual inflation rose by 5% in the 12 months ending in March, down slightly from the 6% reported in February. The Fed has not indicated any further rate hikes and suggests a potential pause. Powell emphasized that the Fed is ready to take action if needed and that their decision will be based on incoming data and events that unfold.
Soft Landing and Bitcoin Performance
It should be noted that Powell has been using the term “soft landing” to describe the Fed’s goal of lowering inflation without causing a recession or economic crisis. If the Fed cuts rates by the end of 2023, it is likely that this has already been factored into the market, and there is a good chance the Fed will be able to achieve a soft landing, allowing financial markets to continue growing according to YouHodler Chief of Markets Ruslan Lienkha’s email to Blockworks.
On the other hand, eToro’s investment analyst, Callie Cox stated via a May 3 tweet that Bitcoin’s performance has been impressive in the last 7 out of 10 Fed days during the past 14 months. During those seven instances mentioned, it has outperformed the stock market.
In a related statement by Greg Magadini, director of derivatives at Amberdata crypto analytics firm, he noted that Bitcoin has been largely driven by macroeconomic events. The analyst explained that a 25 basis point Fed hike has already been priced in, so it is unlikely to trigger any significant reaction. However, any indication of a pause in rate hikes going forward could be positive for the crypto and may push it slightly higher, potentially reaching the $29K to $30K mark.
The Federal Reserve’s decision to raise interest rates for the first time since 2007 amidst bank collapses and inflation concerns reflects the economic uncertainties facing the US economy. However, the government agency has signaled a potential pause in further Fed hikes and will be closely monitoring incoming data to determine its future policy actions. As the market braces for a possible soft landing, the performance of Bitcoin, which has outperformed the stock market on most Fed days, remains an important indicator of the macroeconomic landscape.
There are many other factors that could potentially impact the movement of BTC though, beyond the ones mentioned in the article. Some of these factors include further government regulations, adoption rates by businesses and individuals, the emergence of competing cryptocurrencies, and geopolitical events such as economic sanctions or political instability in major countries. Furthermore, investor sentiment and market psychology can also play a significant role in the movement of BTC and other cryptocurrencies.
Giancarlo is an economist and researcher by profession. Prior to his addition to Blockzeit’s dynamic team, he was handling several crypto projects for both the government and private sectors as a Project Manager of a consultancy firm.