Bitcoin Erases Losses As Fed Raises Interest Rates By 0.75% In Largest Hike Since 1994

Bitcoin Erases Losses As Fed Raises Interest Rates By 0.75% In Largest Hike Since 1994

The Federal Open Markets Committee (FOMC) raised its target interest rates by 75 basis points on Wednesday, the largest rate hike since 1994.

The raise came in line with market expectations that foresaw a more hawkish committee in action as latest inflation figures came above expectations, marking a new 40-year high at 8.6%. FOMC Chair Jerome Powell, who also serves as chair of the Federal Reserve, had said in the beginning of May that the committee would enact a 50 basis point raise in June had market data such as the consumer prices index (CPI) come as expected.

Powell explained the reasoning behind a change in course in a press conference held following the release of the FOMC monetary policy decision on Wednesday by leaning on inflation – which he said had “again surprised to the upside.”

“Over the coming months we’ll be looking for evidence that inflation has been turning down,” Powell said. “Hikes will continue to depend on incoming data, but either a 50 basis points or 75 basis points increase seem more likely for the next meeting.”

Powell highlighted once again that the main goal of the Fed and its FOMC is to bring inflation down to its 2% target. Notably, the committee’s latest statement removed a line from its past statement that read, “With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.” However, the FOMC appended a line to that paragraph that stated it is “strongly committed” to curbing inflation to the target rate.

The summary economic projections , was also released by the committee. This document contains the analysis and forecasts for all FOMC members regarding gross domestic product (GDP), growth, unemployment rate, and inflation for the current year and the next two.

Participants now expect interest rates to reach 3.4% by the end of the year and 3.8% by the end of 2023 before decreasing in the following years.

Powell stated that the committee does not anticipate a U.S. recession, as per member projections. He said that the FOMC is monitoring the most important economic information in order to be nimble in monetary policy.

“We are not trying to incite a recession,” Powell stated. The Fed chair navigated his speech between the things that monetary policy can and cannot influence. He explained that although most of the Fed’s work will be to rebalance supply and demande, policymakers can only address the demand side. The majority of inflation is currently caused by the supply side.

Powell cited the rise in commodity prices as a result of the war in Ukraine, and wider supply chain disruptions, as key factors currently affecting inflation.

” Our objective is to bring inflation down by 2% while the labor force remains strong,” Powell stated. “What is becoming clearer is that many factors we don’t have control will play a major role in determining if it’ll be possible .”

” When demand goes down, you could notice…inflation coming down,” Powell stated. He also said that although it was theoretically within the Fed’s power to reduce demand, it wasn’t certain that such a reduction would be achieved. Powell explained that even a slight increase in unemployment would not negate the possibility of bringing down inflation.

” If you could get inflation down to 2%, and have unemployment at 4% then that’s still historically low,” he stated. “I believe that this would be a success. We don’t seek to put people out of work, of course, but you cannot have the kind of labor market we want without price stability.”

Notably, the Fed’s balance sheet appears to be already reducing as quantitative tightening began on June 1 – as said in the committee’s previous meeting.

Fed balance sheet

Latest data shows the balance sheet of the Federal Reserve taking a breather after going parabolic at the outset of the COVID pandemic. Image source: FRED.

Bitcoin plunged ahead of the release of the new monetary policy statement but started recovering as soon as Powell went live. Peer-to-peer digital currency rose 7. 42% to $21,900 while the chair of the Fed spoke. Bitcoin is trading at around $21,700 at press time.

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