Fed Raises Benchmark Interest Rate by 25 Basis Points

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Fed Raises Benchmark Interest Rate by 25 Basis Points

By Helene Braun

The prospect of higher rates has weighed on bitcoin and other risky assets.

In a widely telegraphed and anticipated move, the U.S. Federal Reserve said Wednesday that it will lift the fed-funds rate by a quarter-percentage point to a range of 0.25%-0.5% from the current rate of close to zero. This is the first time since December 2018 that the central bank has raised its benchmark interest rate.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures,” the Fed said in a statement. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

The Fed also announced that it will reduce its balance sheet “at a coming meeting.” It didn’t specify whether that will happen at its next meeting in May.

The interest rate hike, approved by the Federal Open Market Committee, comes after the widely tracked consumer price index (CPI) accelerated to a four-decade high of 7.9% in February, with many economists predicting inflation still hasn’t peaked yet. On Tuesday, the U.S. Labor Department reported that the producer price index (PPI) rose 10% in February to an all-time high.

Crypto traders were closely watching the Fed’s policy statement. The prospect of what could be a prolonged series of rate hikes or balance sheet reductions or both has been a headwind for digital asset prices, particularly for the price of bitcoin (BTC).

“I’d say that the market is not going to react to the rate hike but will likely react very sharply to anything said in the statement or more likely, the press conference, that indicates a change in the quantitative easing exit schedule or the start of quantitative tightening,“ Bob Iaccino, chief strategist at Path Trading Partners and co-portfolio manager at Stock Think Tank, said before the Fed made its announcement.

“Equity markets do not tend to suffer all that often or all that much, during rate-hike cycles, [and] since the bitcoin/Nasdaq correlation is still holding very strong, I would expect the same thing for cryptocurrencies in general,” Iaccino said.

Bitcoin (BTC) was trading below $40,000 after the decision was announced, still within range of swings that occurred during Asian trading hours.

Traders were likely watching whether the Fed’s comments would be “dovish” or “hawkish,” two terms used to describe an either cautious or more aggressive path ahead by the Fed. The CME FedWatch Tool shows that traders are split evenly over whether the central bank will go with a 25- or a 50-basis point increase at its meeting in May, which could bring the rate to as high as 1%.

Alongside Wednesday’s policy decision and statement, the Fed also released its quarterly economic projections and its “dot plot” showing expectations for the fed-funds rate, which is the overnight lending rate between banks.

The median expectation is now for seven 25-basis point hikes for 2022, which would bring the fund’s rate up to 2.8%. That is about 100 basis points higher than what was expected three months ago.

Committee members are also predicting much slower gross domestic product growth for 2022 that what they predicted before. They now see 2.8% growth, down from the 4% growth they estimated in December.

 

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