The Federal Reserve’s tussle with inflation and its effects on crypto
The US Federal Reserve continues to uphold its steadfast commitment to mitigating the escalation of inflation, as demonstrated through recent augmentations of interest rates. The Fed’s endeavor to tackle inflation has not been without consequences of conventional finance, with risk assets displaying a persistent response to each increment in interest rates.
As the correlation between bitcoin (BTC) and conventional finance becomes more pronounced, these interest rate hikes have also influenced the price action of the leading cryptocurrency, further inciting a domino effect within the broader cryptocurrency market. Each of the last eight interest rate hikes has, to varying degrees, impacted the price movements of bitcoin and the broader crypto market, including the recent 0.25% increase.
In March 2022, with the scars of the COVID-19 pandemic still fresh, the Federal Reserve faced the challenge of elevating interest rates for the first time in three years. On Mar. 16, the Federal Open Market Committee (FOMC) instituted a 0.25% hike in interest rates, marking the first increase since December 2018 and bringing the federal funds rate to a range between 0.25% and 0.50%.
Despite the increase, bitcoin remained unaffected and continued its upward trajectory. On Mar. 16, bitcoin closed at $41,114, reflecting a 4.18% increase from the previous day. Following a minimal decline of 0.48% the next day, the asset witnessed a further 2% increase on Mar. 18. Most of the crypto market followed this path.
On May 4, 2022, the Federal Reserve executed another rate hike – its second of the year – elevating the benchmark interest rate by 0.50% basis points. Federal Reserve Chairman Jerome Powell acknowledged this move as a component of the central bank’s initiatives to address the rapidly increasing inflation rate.
Despite the interest rate hike, bitcoin closed on May 4 with a 5% increase, reaching a value of $39,690 by the end of the day. Unfortunately, the asset’s upward trend was short-lived, as it experienced a substantial 7.9% decline the following day.
This downturn was exacerbated by the simultaneous collapse of the Terra ecosystem, leading to a massive 33% decrease in bitcoin’s value from May 5 to May 12. This led to a cascade of reactions from the rest of the crypto market, as lows not seen in a long while materialized across the scene.
The more aggressive 0.75% hike
In June 2022, the Federal Reserve implemented its largest interest rate hike in 28 years, raising interest rates by 75 basis points on June 15. This move was necessitated by the ineffectiveness of the prior two modest hikes in curbing inflation. Unfortunately, this coincided with a bearish climate within the cryptocurrency market, as crypto lender Celsius temporarily suspended withdrawals due to “extreme market conditions.”
Before the interest rate hike, bitcoin had been exhibiting a downward trend. Surprisingly, when the FOMC announced the 0.75% increase, the asset experienced a 2% increase. However, this was followed by a 9.66% decline the next day. Despite another minor increase, bitcoin touched its lows at $17,000 on June 18.
A month after its June hike, the Federal Reserve elevated interest rates by 0.75% for the second consecutive time on July 27, bringing the federal funds rate to a range of 2.25% to 2.50%. In response, bitcoin experienced its most significant single-day increase over three months, gaining 7.99%. The asset recorded an additional 3.88% increase the following day before experiencing consecutive declines in subsequent days.
On Sept. 21, 2022, the FOMC released a statement announcing its third consecutive interest rate hike of 0.75%. Bitcoin closed the day at $18,461, experiencing a 2.99% decrease in value. However, this was followed by a 5% increase the next day. Despite this brief upward trend, the asset went on to experience three consecutive losing days.
In November 2022, despite some favorable economic indicators, the Federal Reserve made a fourth consecutive interest rate hike of 0.75% on the second day of the month, resulting in the highest benchmark rate seen in 15 years.
The impact on the cryptocurrency market was minimal, as bitcoin ended the day with a 1.62% increase and a subsequent 0.28% increase the following day. While there was a 4.66% increase after that, the collapse of the FTX exchange in November eventually brought bitcoin and other digital assets to incredible lows on Nov. 21. Ethereum (ETH) had dipped by 17% to $1,072 on Nov. 9.
The Fed softens interest rate hikes
The Federal Reserve made a final interest rate hike in 2022 on Dec. 14, where it raised the benchmark rate by 0.50% – a less aggressive approach, as inflation appears to have cooled. This led to the federal funds rate being between 4.50% and 4.75%.
Despite the crypto market displaying positive momentum in the days leading up to the announcement, the impact of the rate hike was felt immediately as bitcoin experienced a slight 0.16% increase on the day of the announcement before dipping by 2.51% the following day. The asset went on to experience a further 4.17% decline on Dec. 15.
In addition, ETH slumped by 1% on the day of the FOMC announcement. This decrease was followed by another 3.13% decline the next day. The asset further collapsed by 7.87% on Dec. 15, leading to a low of $1,166.
The most recent meeting of the Federal Open Market Committee (FOMC) resulted in the smallest increase in interest rates in the past seven adjustments. The Federal Reserve raised the benchmark rate by 0.25%, the same rate it started with in March, making this the eighth consecutive increase. The federal funds rate is now between 4.50% and 4.75%.
After the interest rate hike on Feb. 1, the value of bitcoin increased by 2.63%, with ethereum appreciating by 3.55%. However, BTC has since dropped by 3.62% and is currently traded for $22,873. Bitcoin has had four losing daily sessions since the FOMC announcement on Feb. 1. On the other hand, ethereum has performed better, increasing by 3.2% since Feb. 1.