On Wednesday, the US Federal Reserve (Fed) raised rates by 75 basis points, in line with the forecasts of most analysts. Crypto assets mainly reacted by trading higher in the first hour after the news was announced. (This is a developing story and is constantly being updated.)
“[…] The Committee decided to raise the target range for the fed funds rate to 1-1/2 to 1-3/4 percent and anticipates that continued increases in the target range will be appropriate,” the Fed statement said.
Bitcoin (BTC) reacted to the news by immediately trading lower in the market, before later reversing higher. 1 hour after the announcement, the number one cryptocurrency was up 2% at $21,560. At the same time, ethereum (ETH) rose a much stronger 6% to $1,180. Stocks reacted similarly, with the broad S&P 500 index up 0.17% in the first hour after the announcement.
Today’s Fed statement also said that the central bank plans to continue reducing its holdings of Treasuries, agency debt and mortgage-backed securities, while reiterating that it is “strongly committed” to bringing inflation back to normal. 2% target. Meanwhile, the Fed’s future rate projections now show that it plans to start cutting rates in 2024.
The rate increase is higher than the 50 basis point hike Fed officials previously indicated they would make, but is in line with what most market participants estimated after an inflation report was released. higher than expected last week.
Powell said in an earlier interview with the Wall Street Journal that if the central bank doesn’t see “clear and convincing evidence that inflation pressures are easing,” it “will consider acting more aggressively.”
At its last meeting in May, the Fed raised rates by 50 basis points. So the hike marked the first of its kind since 2000. Hikes of 75 basis points are even rarer and haven’t happened since November 1994, when then-Fed Chairman Alan Greenspan sought to combat rising inflation.
Fed funds rate before Wednesday’s hike:
Commenting ahead of today’s Fed announcement, crypto broker overall block analyst Marcus Sotiriou said an aggressive Fed, contrary to conventional wisdom, could be the best outcome for markets today.
“I think a very aggressive Federal Reserve might be the best way forward for the markets so that the Federal Reserve can resume [quantitative easing] before,” Sotiriou said in an emailed comment.
He added that quantitative easing (QE) by the Fed is what has driven the rise of both cryptocurrencies and other risky assets in recent years, and that a Fed tightening means investors “are forced to undo their positions”, which inevitably leads to a reduction in prices.
“Investors cannot realistically expect risk assets to trend more sustained up until the Fed changes,” Mikkel Morch, CEO of crypto/digital asset hedge fund. ARK36he said in an emailed comment, adding that bitcoin (BTC) “has really been caught in the crossfire in the last few days.”
According to him, there is still a big gap between nominal rates and real rates, so there is much more room for the Fed and other central banks to raise in the coming months.
“So, Bitcoin gets a double whammy and it is more than likely that we will see sub-[USD 20,000] prices soon,” Morch said, adding that demands for $12,000 per BTC are “relatively low probability for now.”
Meanwhile, the asset manager Double Line Capital Chief Executive Officer Jeffrey Gundlach, known as the King of Bonds, suggested that the Fed should be even more aggressive. saying on Twitter that 3% would be, in his view, an appropriate level for the fed funds rate.
Before today’s hike, the fed funds rate was between 0.75% and 1%.
Mohamed A. El-Erian, a well-known economist and president of University of Cambridge‘s queen’s collegewho wrote in a Bloomberg op-ed that the Fed “desperately needs to regain control of the inflation narrative.”
If the Fed fails to do so, it risks turning its reputation into something that resembles “an emerging market bank that lacks credibility and inadvertently contributes to undue financial volatility,” El-Erian wrote.
Also commenting before the walk, Peter Brandt, a veteran trader, said the Fed “never in the modern history of the Fed has been so far behind.”
“Solution: Fed rate hike by 400 [basis points]let the stock market crash then hit the reset button,” Brandt suggested to his more than 600,000 Twitter followers.
The ECB tackles market turmoil
The Fed’s move came on the same day as the european central bankThe Governing Council’s (ECB) met in an emergency meeting to address the turmoil in the European government bond market.
According to an ECB statement after the meeting, the central bank will now “apply flexibility” when it comes to reinvesting profits from its pandemic-era bond purchase program.
He added that he will speed up work on the design of a new “anti-fragmentation instrument” that will be put to the consideration of the Governing Council. The statement did not specify what such an anti-fragmentation instrument might look like.
“Anti-fragmentation” refers to the work the ECB does to prevent differences in government bond market conditions across the eurozone from becoming too great.
– This is why the Fed could attack inflation more aggressively
– Forget the market crash: Inflation will define Bitcoin this year and beyond
– Fed Has ‘Limited Firepower’ For Rate Hikes, Current Expectations Already Price Bitcoin – CoinShares
– When Bitcoin meets inflation
– Mentally prepare for lower Bitcoin prices as rates rise, Bitcoin 2022 panelists warn
– Davos Watch: Real interest rates to remain at ‘none or next to nothing’ and a higher inflation target
– As Inflation ‘Softens,’ Cryptocurrencies Likely to Bottom in ‘Second Half of 2022’ – VC Investor
– Inflation should be seen as public enemy number 1