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The Fed has acted on its decision to hike interest rates by 75 basis points and now sees its benchmark rate in the 2.25%-2.5% range.
The US Fed has decided to hike interest rates by 0.75 percentage points for the second consecutive time in a bid to tackle inflation. This latest fiscal decision by the Federal Open Market Committee (FOMC) takes its benchmark rate to a range of 2.25%-2.5%. Furthermore, the combined interest rate hikes in June and July represent the most stringent consecutive action by the Fed since the early ’90’s.
Although the aggressive move is expected to keep pressure on all markets, Bitcoin’s (BTC) price changed slightly following the announcement.
The latest interest rate hike is the fourth time altogether that the Fed has taken such a decision this year. The Federal Open Market Committee (FOMC) explained spending, jobs and unemployment in a recent statement. According to the group of 12 Fed officials who set the Fed’s monetary policy, the governing bank explained:
“Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the [coronavirus] pandemic, higher food and energy prices, and broader price pressures.”
The Fed’s decision to raise rates by such a substantial margin also comes as no surprise to many. According to CME FedWatch Tool, traders had already bet on a 74% chance that the US central bank would make such a move. Predictions initially reached a 100-basis point rate hike after the consumer price index (CPI) in June revealed a higher-than-expected inflation rate. However, Fed officials later intimated that they were eyeing a 0.75 percentage point increase.
Fed to Tread Cautiously on Another Projected Interest Rates Hike
Meanwhile, Fed Chair Jerome Powell reportedly does not rule out another 75-basis point rate increase for the next meeting. However, he admitted that it is necessary to slow down rate hikes at some point to avert an economic meltdown. Nonetheless, Powell does not think the economy is in recession, although growth was negative in the first quarter. The Fed Chair further stated that growth was expected to be barely positive in the second quarter. According to Oanda senior market analyst for the Americas Edward Moya:
“It seems traders aren’t thinking another large move will be justified in September. The FOMC decision provided optimism that the end of tightening is in sight and that triggered a nice rally for risky assets that helped elevate cryptos.”
The Fed’s fund rates directly impact what commercial banks charge each other for short-term loans. However, it also affects several consumer products available to third-party entities. These products include adjustable mortgages, auto loans, and credit cards.
Meanwhile, the price of BTC rose 3.6% in the hour following the Fed’s interest rates hike. Although this is an encouraging development, Howard Greenberg, crypto educator at Prosper Trading Academy, discussed touched on the adverse effects of Fed hikes on Bitcoin. According to him, past rate hikes have impacted BTC ‘s price, causing some companies to sell off sizable Bitcoin stakes. These include a number of public Bitcoin mining companies as well as electric vehicle manufacturer Tesla.