The US Federal Reserve increased interest rates by half a percentage point, in line with market expectations on Wednesday. Bitcoin and other risk assets swiftly recovered on the news as monetary policy enters unfamiliar waters.
The rate hike comes a time when inflation is hitting the US hard as the central bank attempts to navigate uncharted territory.
The United States Federal Reserve has raised interest rates by a half-point, as the country grapples with high levels of inflation. This rate hike is the largest since 2000, and the central bank had not raised the rate by more than a quarter-point since that year. It will also reduce its asset holdings starting in June. This includes Treasury securities, agency debt, and agency mortgage-backed securities. In other words, monetary tightening will continue, but a 75 basis point rate hike is out of the question for 2022.
Watch Chair Pro Tempore Powell’s statement from the #FOMC press conference:
Intro clip: https://t.co/LyjKqfmMs1
Full video: https://t.co/JjXfKZpKef
Press Conference materials: https://t.co/H01V7HNyXZ
— Federal Reserve (@federalreserve) May 4, 2022
The US is facing self-inflicted high inflation which is affecting citizens in the US, while also causing a ripple effect on the rest of the world. The Consumer Price Index is at 8.55%, the highest in four decades. This index measures the weighted average price of certain consumer goods and services, which include food and transportation.
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More Rate Hikes & Reduction in Balance Sheet
The Federal Reserve did not discount more interest rate hikes in the future, however, noting geopolitical tensions and global macro economic activity.
The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the US economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.
The Fed will aim to reduce its balance sheet by $47.5 billion per month in June, July and August. This reduction in the Fed balance sheet will reduce by up to $95 billion per month starting in September. Analysts tend to see a reduction of the Fed balance sheet as a headwind for risk assets, but it remains to be seen whether the merely $2 trillion crypto market would feel the brunt of such policies. This is especially unclear due to Bitcoin’s tendency to switch between ‘risk-on’ and ‘risk-off’ narratives.
Unchartered Territory
Amidst this backdrop, some economists believe that raising rates too hard and too fast would make Bitcoin a net beneficiary due to its safe-haven-like properties. Just after the FOMC meeting, Bitcoin closed 6.5% higher on the day.
However, legendary investor and hedge fund manager Paul Tudor Jones this week warned investors to stay away from stocks and bonds under the current regime. He told investors to prioritise capital preservation, but also underlined that “it’s hard not to want to be long crypto”. This is in large part due to a “generational divide”, where the smartest young people are “going into crypto”.
This begs the question, is Paul Tudor Jones betting that the burgeoning crypto market will bypass Fed monetary policy?
A recent survey found that crypto payments in 2022 are forecasted to rise by 70% in the United States.
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