It was announced by Fed chairman Powell in the FOMC meeting yesterday that the interest rate would be raised by 50 basis points, the largest single rise since 2000. Bitcoin and the whole crypto market bounced significantly on the news.
Although the rise was so big, it was what was expected, and the market likes its expectations to be realised. Therefore, when the news of the rise came out, and there was no additional hawkishness to add, the cryptocurrency market saw a substantial bounce.
It was also announced that the Fed would begin reducing its $9 trillion balance sheet by $47.5 billion a month from June 1. This will rise to $95 billion 3 months after this.
However, previous talk of a 0.75% interest rate hike was taken off the table by Powell, at least for the near future. This news was well received by markets and add this to a lack of any surprises, the markets rose during and after the meeting.
Crypto rose the most. Bitcoin broke upwards through a downwards trendline it had been respecting since the end of March, rising just over 6% on the day, just within touching distance of the $40,000 resistance.
Generally the rest of the crypto space followed suit. Ethereum rose 6.8%, and other large cap layer 1s fared even better, with Cardano, Avalanche, and Tron, all up over 10%.
Looking into the immediate future, Jerome Powell outlined that 0.5% increases should be on the table for the next couple of FOMC meetings. However, he did say that the underlying momentum in the economy was strong, although admitting that inflation was “much too high”.
He acknowledged that the amount of inflation had been a surprise to the Federal Reserve, and that further surprises may be on the cards. Nevertheless, he said that he expected to see inflation at least flattening out even if it didn’t drop in the short term.
Jerome Powell saying that the Federal Reserve was surprised by the inflation spike is a surprise in itself. Having printed 80% more dollars ever in existence in just the last 2 years was always going to have an impact, and that is an understatement. This is to say nothing of a corresponding debasement in purchasing power for US citizens.
The Fed is well and truly boxed in now. It cannot raise interest rates very much at all given that this will impact massively on its debt repayments going forward. All that can be expected from here on in is a balancing act between allowing a recession on the one hand, and inflation to continue climbing on the other.
Bitcoin is very likely to benefit in this kind of scenario. Investors have run out of options on where to put their wealth. Banks are completely out of the question now. A capital flight into bitcoin may come sooner than many think.