In a widely anticipated move, the US Federal Reserve raised fed-funds rate by 0.25% from the current near-zero rates.
The move will make the cost of capital more expensive. But with US inflation at a 40-year high, has Fed Chairman Jerome Powell brought a knife to a gun fight?
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Change in 2018 Policy
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 US 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 announced it will begin reducing its balance sheet “at a coming meeting”, but did not specify whether it will happen in May or later this year.
The rate hike comes after the consumer price index (CPI) hit a four-decade high of 7.9%. This is the lowest possible figure US officials could come up with. In reality, CPI is almost certainly in double digit territory.
Committee members are also anticipating slower US GDP growth for 2022 than was previously predicted. They see growth at 2.8%, down from the 4% growth estimated in December. With a backdrop of all-time-high inflation, this is not a good sign.
Crypto Market reacts to Fed Policy
Bitcoin displayed typical volatile behaviour around the FED meeting, fluctuating below $40,000 after the decision was announced. The leading crypto has been ranging between approximately $35,000 and $45,000 since the first week of January.
Traders were eying the Fed’s comments to deduce whether they would be ‘within expectations’, “dovish” or “hawkish”. The two terms are used to describe a cautious or aggressive stance of Fed policy. According to the CME FedWatch Tool, traders are split as to whether the central bank will opt for a 0.25% or 0.50% percent increase at its meeting in May.
Regardless, Wednesday’s 25 basis point increase shows a dovish approach, which will likely avert a recession in the immediate short term, but doesn’t have any material impact to curb inflation. Bitcoin is up 4.3% in 24 hours, trading at $40,650 t the time of writing as seller exhaustion rises.