Bitcoin Drops to 27K as Fed Announces Fresh Rate Hikes

Bitcoin Drops to 27K as Fed Announces Fresh Rate Hikes

Bitcoin prices fell after the Federal Reserve announced it is raising the borrowing interest rate on the U.S. dollar by another 25 basis points (BPS). The central bank warned that the recent turbulence in the banking sector could create a bumpy ride as it continues to fight rising inflation in the U.S. economy. 

On Wednesday, the Federal Open Market Committee (FOMC) released a statement saying that recent market indicators point to a “modest growth” in spending and production. Despite inflation levels remaining high, the country’s job market was creating new jobs at a “robust pace,” and unemployment rates remained low.

Federal Reserve Hikes Borrowing Interest Rate on U.S. Dollar By 25 Basis Points

In an effort to bring inflation down to its optimal level of 2%, the Committee has decided to raise its target range for the federal funds rate between 4.75% and 5% for the year, making it the ninth consecutive rate hike by the Fed. But after a series of bank collapses and bailouts in the United States and Europe – Silicon Valley Bank, Signature Bank, and Credit Suisse – the central bank has warned that recent market turbulence is most likely to result in “tighter credit conditions” for households and businesses which will certainly weigh on economic activity, hiring, and inflation. 

Federal Reserve Hikes Borrowing Interest Rate on U.S. Dollar By 25 Basis Points

However, the Committee is uncertain about the extent of these effects, warning that further rate hikes are to be expected from the Fed in the long run.

The Federal Reserve will determine whether to increase its target range based on the cumulative tightening of monetary policy and which of its policies affect economic activity and inflation, and economic and financial developments. The Committee revealed that it reduced its holdings of U.S. Treasury securities, agency debt, and mortgage-backed securities by $500 billion since June 2022.

Federal Reserve Chairman Jerome Powell claimed that the U.S. banking system is “sound and resilient,” adding that the Fed is reviewing the situation to see if it needs to strengthen regulations surrounding banks.

He also assured depositors that their funds remain safe, coinciding with Treasury Secretary Janet Yellen’s statements to soothe depositors and investors affected by the collapses of Silicon Valley Bank and Signature Bank – the biggest bank failure since the 2008 financial crisis. 

While testifying before the Senate Appropriations subcommittee on Wednesday, Yellen said that federal bank regulators will not insure U.S. bank deposits without approval from Congress. She also added that the U.S. government could backstop deposits of other banks under the Federal Deposit Insurance Corporation’s (FDIC) insurance policy to avoid broader effects of the banking contagion. The FDIC has insured deposits of up to $250,000 in all U.S. banks. 

The Fed now expects inflation rates to remain at a higher level this year than it had predicted. The unemployment rate is also expected to rise from 3.6% to 4.6% by the end of 2023. The latest Consumer Price Index (CPI) figures showed inflation to have slowed from 6.4% in January to 6% in February, way down from the 40-year high of 9% last June.

However, core inflation, which determines price increases for everyday products and services excluding food, housing, and energy costs, rose 0.2% during the month and is 4% higher compared to 2022. 

The rise in core inflation was pointed out by some market analysts as one of the main reasons the Fed may continue to increase interest rates further down the line. However, the financial community was divided on the increase, with some saying the Fed may hike the rates by 50% while others said there won’t be any increases at all this month. 

Federal Reserve Hikes Borrowing Interest Rate on U.S. Dollar By 25 Basis Points

A reason to speculate why the Fed might pause rate hikes was due to it being responsible for causing the banking crisis. The banks had taken advantage of pre-pandemic era zero-interest rates by the Federal Reserve to invest customer deposits into high-yielding long-term securities. 

However, following a rise in inflation due to pandemic-era monetary policies, the Federal Reserve had to hike borrowing rates on the dollar, which depreciated the returns on assets like Treasury bonds and mortgage-backed securities held by banks.

This led to the banks attempting to raise capital to process customer withdrawals, and when they failed had to resort to selling their investment at heavy losses. The event led to depositors worrying about the status of their funds and rushing to withdraw, causing a run on the banks, which resulted in the insolvency and shutdowns of Silicon Valley Bank and Signature Bank. 

Continued Rate Hike Will Cause Consumer Prices to Increase

The Fed’s rate hike was reflected in the price of Bitcoin (BTC) on Thursday, as the world’s largest cryptocurrency by market cap lost over 4% of its value, bringing it down to $27,500. BTC has since recovered and is trading at $27,909 – down 1.7% since yesterday. 

The banking contagion caused Bitcoin to rally to a nine-month high of $28,870 earlier this week. The price action indicated that the cryptocurrency was finally decoupling itself from the broader market conditions and proving its point as a hedge against inflation. 

The Fed’s decision will have a long-lasting effect on the economy, making it more expensive for consumers to borrow and invest under current market conditions. 

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