Bitcoin will Rebound Soon! The Fed’s Biggest Interest Hike will be the Reason
The Fed’s interest hike is pointing at a brighter future for Bitcoin and its investors
The Bitcoin price was again tested on Wednesday, dropping close to US$20,000 per coin before recovering to around US$22,000 after the Federal Reserve announced it would continue to raise the interest rates. The Federal Reserve on Wednesday surged interest rates by 0.75%, the largest it has done in one go in 28 years. The central bank added that it wouldn’t stop there—and that more raises would come later this year. This caused the price of Bitcoin, the largest cryptocurrency by market cap, to drop to US$20,392 Wednesday afternoon Eastern Time. It has since bounced back, and at the time of writing this article, the crypto was trading at US$21,559.63, according to CoinMarketCap. Bitcoin and the wider cryptocurrency market have taken a beating over the past several weeks as investors shed risky assets from their portfolios. The digital asset space has been very closely correlated with equities. Bitcoin did today what it has been doing, for the most part, this year—and following the stock market: on the news, the S&P500 and Dow Jones Industrial Average also dropped before rallying.
In the economic projections released on Wednesday, the median Fed policymaker expects to further raise interest rates to roughly 3.4% by the end of the year. That would suggest another 1.75% in total rate hikes, spread across the remaining four scheduled policy-setting meetings this year. The Fed is now messaging a much steeper path of rate hikes than it had previously forecasted in March (when the median member projected a year-end short-term rate closer to 1.9%). The central bank also downgraded expectations on other key economic measures, expecting the U.S. economy to grow by only 1.7% this year, compared to the 2.8% it had forecasted in March. Fed officials also suggested they could see unemployment rise this year, with the median member now forecasting a 3.7% headline unemployment rate by the end of the year (which would be a notch up from the 3.6% recorded in May).
The decision to raise interest rates by 0.75% was an abrupt turn from last week when the markets had largely expected the central bank to follow through on its communicated strategy of raising interest rates by 0.50%. But a hot inflation report on Friday, showing the fastest pace of price increases since 1981, showed little sign of alleviating price pressures in the month of May. Combined with other economic data showing the worst reading of consumer confidence since the 1970s, the pessimistic outlook pushed the Fed to entertain the idea of abandoning its prior plan. The decision to raise rates by 0.75% on Wednesday was not unanimously agreed to — Kansas City Fed President Esther George dissented, with the statement noting that she favored a 0.50% move.
The Fed’s economic projections suggest confidence among policymakers that a more aggressive rate hike path will cool inflation. Although the central bankers raised their expectations on inflation for 2022, the median member of the committee expects to see the pace of headline price increases cool to 2.6% next year. These forecasts suggest inflation could further in 2024 to 2.2%, much closer to the Fed’s 2% target.