On Wednesday, the Federal Reserve announced another massive 75 basis point (bp) increase in the federal funds rate (FFR) as part of its continuing efforts to suppress inflation. This meant raising interest rates by three-quarters of a point to a target range of 3.75 to 4%.
The interest rate hike comes long before the Federal Open Market Committee (FOMC) meeting. The Fed believes the Russo-Ukrainian war is causing much hardship from human and economic perspectives. The situation also drives increased pressure on inflation and affects global economic activity.
In a statement citing the committee’s attentiveness to inflation risk, the FOMC said:
“Job growth has been significant in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting the imbalance of supply and demand associated with the pandemic, higher food and energy prices, and broader price pressures.”
Following the Fed’s 75 bp announcement, the price of stocks leaped, as Bitcoin’s (BTC) price went up by 1% one-hour post-announcement. Gold and silver also reacted to the announcement with 0.98% and 1.58% price surges in gold per troy ounce for gold and silver, respectively.
In his subsequent speech, Jerome Powell articulated the necessity for increasing rates and stringent monetary policy, citing the need to combat the country’s ‘red-hot inflation.’ On several instances, the chair has said that the Federal Reserve is striving to achieve the 2% inflation rate, calling it an important goal for the central bank.
When journalists asked Powell whether the Fed would change course by December, the Fed chair said:
“The slowdown in restrictive measures is approaching and could happen at the upcoming meeting or the next.”
The Fed chair also said that Americans could expect more rate increases, though possibly not equal to the magnitude of previous ones. He also explained the uncertainty surrounding the level of interest rates, saying:
“…Even so, we still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
Industry pundits and market analysts think all the good reports about job increases and rising order rates in the economy are a false narrative to serve as a strategy for the November 8 elections.
“Jerome Powell can talk as much as he wants about the increase in the confidence index, the victory over the recession, and make other hard-to-believe conclusions; the market will not be deceived.”
Inflation remains in acceleration mode, despite a revised calculating method. The current 8.2% discourages any speculation that all indicators will collapse post-election. It is a widespread belief that inflation will cross the double-digit threshold even as state reserves of oil and diesel fuel approach complete exhaustion.
Resultantly, some experts support the Fed’s move to raise interest rates despite its effect of causing more unemployment. The dual authority of the Federal Reserve holds that it must balance inflation and employment.
In his Washington Post column, former U.S. Treasury Secretary Larry Summers invited Fed Chair Jerome Powell to ‘maintain an aggressive stance on rate hikes, even if it causes job losses in the short term.
What This Means For Crypto
The growth experienced by stocks, precious metals, and Bitcoin following the FOMC statement began to slow down right after Powell’s press conference was over, with all four major stock indexes going down and BTC recording up to -1%.
Vigorous rate hikes are detrimental to crypto prices, and market pundits speculate that price volatility will continue in the short term. The Federal Reserve strives to stabilize the economy and inflation through rate hikes. Nonetheless, as a consequence is expected to end price increases, and a slowing economy negatively affects corporate earnings and market sentiment.
The negative sentiment goes past Wall Street to influence the crypto market. This comes as industry players become more risk-averse in response to a deteriorating economy. Interest rate hikes are progressively suppressing the U.S. economy, which has already suffered two consecutive quarters of poor GDP this year and is on the brink of a recession. If the stock market topples over following the latest rate hike, the crypto market will also fall.
Considering how quickly interest rates have been climbing in 2022, a key concern is how high they will go. Given that the crypto economy relies on solid fundamentals in the long term, investors may use this as the opportune time to acquire select high-quality investments at low costs. Historically, those who dive deep into the market during such turbulent times when market sentiment hits the bottom end up being the biggest winners in the bull market.