Federal Reserve's Rate Decision: Bitcoin and Economy Impact

syifanikm@gmail.com . June 14, 2023

The U.S. Federal Reserve's recent decision to leave its benchmark fed funds rate range unchanged at 5.0-5.25% has sparked significant interest and discussion among market participants. The central bank cited the need for additional time to assess the impact of its previous efforts to tighten monetary policy on the economy. This move by the Fed's Federal Open Market Committee (FOMC) was largely expected, and its effects were immediately visible in the price of bitcoin (BTC), which experienced minimal changes, hovering just below the $26,000 mark.

The Fed's decision to tighten monetary policy began in March 2022 with the intention of curbing inflation, which was then running at an annual pace of over 8%. Over a span of ten consecutive meetings, the central bank gradually increased interest rates, ultimately bringing the fed funds rate from 0-0.25% to its current level of 5.0-5.25%. Although inflation has shown signs of gradual decline over the past year, with the Consumer Price Index (CPI) report in May revealing a rate of 4%, the lowest in two years, it remains above the Fed's target of 2%. The central bank acknowledges the time lags associated with the implementation of monetary policy, and as the recent rate hikes work their way through the economic pipeline, it is expected that inflation will continue to decrease.

The Fed issued a statement explaining its approach: "In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

One notable consequence of the Fed's aggressive interest rate increases has been the impact on the bitcoin market. The bearish sentiment surrounding bitcoin has caused its price to tumble from its all-time high near $69,000 in late 2021 to its current range around $26,000. However, the notion that the central bank might reduce its tightening efforts has become one of the bullish factors for bitcoin in 2023 and beyond.

In addition to the rate decision, the Fed also released its latest quarterly economic projections, which shed light on the central bank's outlook. According to the projections, FOMC members anticipate a terminal fed funds rate of 5.6% in 2023, as compared to the 5.1% forecasted in March. For the end of 2024, the projected terminal fed funds rate stands at 4.6%, reflecting an increase from the 4.3% estimate in March. In terms of inflation, the Fed now projects headline inflation to reach 3.2% in 2023 and 2.5% the following year. These figures are slightly lower than the March projections of 3.3% and 2.5%, respectively.

The terminal fed funds rate of 5.6% for 2023 implies that more rate hikes are likely to be implemented later this year, despite the current pause. Currently, market participants are pricing in a 70% probability of a 25 basis point increase at the Fed's next meeting in July.

During the post-meeting press conference, Fed Chair Jerome Powell emphasized the central bank's commitment to reducing inflation and reiterated that the majority of FOMC members anticipate further rate hikes in the coming months. However, he acknowledged that the full effects of the Fed's previous tightening measures have yet to be fully felt in the economy. Regarding the potential resumption of rate hikes at the July FOMC meeting, Powell stated that no definitive decision has been made at this point.

Following the announcement, both the Nasdaq and S&P 500 initially experienced declines but managed to recover, moving into modestly positive territory for the day. Meanwhile, the price of bitcoin remained relatively stable, hovering just below the $26,000 mark.

The Fed's decision to maintain the current fed funds rate range and its cautious approach to further tightening reflects its ongoing efforts to strike a delicate balance between curbing inflation and supporting economic growth. As the effects of the previous rate hikes gradually permeate the economy, market participants will continue to monitor the central bank's actions closely for any potential signals regarding future monetary policy adjustments. In the meantime, the bitcoin market remains susceptible to the interplay of various factors, including the Fed's stance on interest rates, overall market sentiment, and regulatory developments.

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