Will The Crypto Market Be Better After The Fed’s Rate Raise?

Current context of the general market

The Federal Reserve’s monetary policy actions, such as the United States central bank, significantly influence financial market volatility.

The release of Federal Reserve monetary policy choices frequently causes big changes in the markets, with investors and traders keeping a close watch on the event. The influence of the Federal Reserve’s monetary policy choices on the market is mostly shown via changes in interest rates.

If the Fed votes to increase interest rates, market interest rates will rise, resulting in greater borrowing costs and influencing consumption and investment choices. Moreover, rising interest rates may lead the stock market to fall as investors choose to invest in safer bonds.

If, on the other hand, the Fed chooses to lower interest rates, market interest rates will decrease, encouraging consumption and investment and perhaps leading to a surge in the stock market.

In the early 1980s, the Federal Reserve used economic savings to combat excessive inflation, laying the groundwork for a 40-year bull market in fixed-income assets via painful interest rate rises.

The run eventually terminated on March 17, 2022. This is the first time in four years that the Fed has opted to increase the basic interest rate rather than leaving it set at 0-0.25% during the two years of the COVID-19 epidemic.

It’s been one year since then. Last week, the central bank raised its rate by 25 basis points to 4.75-5%, the highest level since 2016, in an effort to combat the highest and most persistent inflation.

Financial casualties have piled up along the road, with the fixed-income market being one of the worst. Bonds have suffered record losses in the last year, from US Treasuries to investment-grade corporates.

Federal Reserve Chairman Jerome Powell and his colleagues have considered the interest rate hike at the moment. If stopped, the target set by the Fed earlier will be difficult to achieve this year, but if it continues, examples like Silicon Valley Bank or Silvergate will be many more.

This is one of the Fed’s most difficult issues since the 2008 financial crisis. Before 2008, the housing market in the United States underwent a protracted boom, during which many consumers purchased hazardous subprime mortgages that were bundled into sophisticated financial products and sold across the globe.

Unfortunately, because of the poor quality of subprime loans, a huge number of loan defaults resulted in a dramatic drop in the value of these financial instruments, causing financial market turbulence. In this context, the US Federal Reserve implemented a number of steps after 2008, including interest rate cuts and liquidity assistance, to relieve pressure on financial markets.

The Fed’s sustained interest rate hikes may weaken economic growth, extinguish deflationary forces, and cause economic instability.

And this kind of instability will result in dramatic market swings or systemic hazards, which may lead to an economic recession, falling asset values, a credit crisis, growing unemployment, and other issues. To minimize the detrimental effects of financial instability on the economy, interest rate rises should be halted and a sensible monetary policy enacted.

That is with the current economic context of the common market. What about other risky assets like gold or fledgling markets like crypto?

Crypto market with Fed decision

During the last month, Bitcoin has risen more than 20%, while Ethereum has gained roughly 10%. Since the US banking sector is in critical trouble, the financial flow has naturally transferred to other markets, including the crypto market.

After the Federal Reserve’s decision to raise interest rates by 25 basis points on Wednesday, Chair Jerome Powell promised that if the financial crisis persists and contaminates other sections of the economy, the central bank would be compelled to adopt a more forceful posture.

Fed funds futures are much below the central bank’s announced year-end objective of 5.1%. Markets anticipate a 4% increase by 2023.

Nonetheless, volatility and Bitcoin dominance indications imply that crypto, especially Bitcoin, is keeping steady for the time being.

Given that risk asset prices have factored in this potential for the foreseeable future, there should be little volatility. And, since the number of interest rate raises in the future is limited, and the stop of interest rate hikes is acceptable, the market will remain hopeful, and the stop of risky assets will grow fighting. This is also seen as a brief reprieve before the official boom.

Expectations have risen as a result of the Fed’s reaction to the SVB-led financial crisis. The Fed is about to change direction and has already resumed quantitative easing, which some worry may lead to US currency hyperinflation and, eventually, the collapse of the whole financial system.

But take it slow, early May will be a new era for the crypto market. At this time, the clear movements of the economy have also revealed the Fed is likely to raise interest rates by 50 points if the market stabilizes. Otherwise, a new Bitcoin high this year will be set.

Conclusion

The Fed faces a significant hurdle in the March round of interest rate meetings. Many elements must be balanced, including but not limited to inflation, employment, economic growth, financial stability, and so on.

Increasing interest rates may reduce inflation, but it may also reduce employment and economic growth, affecting financial stability. Furthermore, hiking interest rates will have an influence on the money market, stock market, bond market, and so on, and the unpredictability of market reaction must be anticipated.

First and foremost, it is important to notice that BTC is presently trading over $27,000, surpassing highs last recorded nine months ago in June 2022.

Currently, as observed by Coincu, the crypto market is still holding its stable level. Wait for the next bull run, as with this rally, there are still a lot of advantages for cryptos over stocks.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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