How Boost in Fed Interest Rate Affects Cryptocurrency

The US Federal Open Market Committee (FOMC) extended a more than a year-long string of rate boosts on Wednesday, raising the federal funds rate by 25 basis points to a specific range of 5% and 5.25%.

The Bitcoin (BTC) price was steady immediately after the news, trading around $28,600.

The Fed’s decision was expected, but traders and investors awaited the accompanying policy statement from Chairman Jerome Powell and the post-meeting press conference to learn if the central bank has seen the Federal funds rate boosts, a break contemplated falling from 0% in early 2022 to 5% – 5.25% now.

The policy statement was eminent for omitting earlier language suggesting that further rate boosts were certain. The statement pointed to “tighter credit conditions;” as important for the economy’s future, and announced by the FOMC will “consider the cumulative tightening of monetary policy, the decrease with which monetary policy influence the economic inflation and activity, and financial and economic developments.”

While inflation has declined from near double digits a year ago to around 5% today, it remains well above the Fed’s 2% target, suggesting that further monetary tightening is needed.

However, the Fed is waging war on two fronts, and the rate hikes likely helped expose the balance sheet woes of many US banks. A spate of lender bankruptcies erupted last weekend as the country’s 12th-largest bank by assets, First Republic (FRC), requested a joint bailout from JPMorgan and Federal Deposit Insurance Corporation (FDIC).

Consequences on Cryptocurrencies

If the Fed takes a break in June, that will be good for Bitcoin because it means easing financial conditions.

We can expect BTC to continue serving as a liquidity barometer, like in January and again in March, as the Fed’s interest rate policy moves into stasis mode. And liquidity is likely to increase an interest rate peak, and the impending recession becomes more evident.

There is also the special case of Ether (ETH) which is more precisely affected by macro gains. Currently, bets on the Ethereum network pay out around 5% of winnings, not counting the price increase. It is less appealing to macro investors when US Treasuries offer similar risk-free yields, but when they fall, the equation changes.  ETH’s relatively stable profitability comes with growth potential.