The US Federal Reserve has announced that it would keep borrowing interest rates the same for this month at 5.25% to 5.5%, much to the relief and expectations of the market. The central bank also revealed that it will start to cut dollar interest rates before the end of 2024.
US Fed Keeps Interest Rates Unchanged, Rate Cuts Expected June Onwards
Following the Fed’s two-day meeting that concluded on Wednesday, Bitcoin (BTC) turned higher, reversing its losses from earlier this week. The flagship cryptocurrency rose 6.25% on Wednesday to trade in the $68,000 range, after falling as low as $60,800 in the previous days.
At the end of the meeting, the Federal Open Market Committee (FOMC) decided to hold interest rates steady, as expected, while maintaining its projection for multiple rate cuts this year, signaling an optimistic outlook for the US economy.
Federal Reserve Chairman Jerome Powell’s speech caused the cryptocurrency market to bounce back to its near-yearly highs after suffering two days of heavy bleeding leading up to the policy meeting.
Cryptocurrencies, like tech stocks, stand to benefit from low interest rates and improved market liquidity, which in turn leads to better market sentiment and greater investment for the digital asset class.
The wider crypto market also rebounded from local lows, with most tokens posting between 5% and 15% of gains. The biggest winners of the rally were Pepe (PEPE) and Stacks (STX), recording over 20% of gains.
The Fed’s decision to keep the rates unchanged comes at a time when the Consumer Price Index (CPI) and Producer Price Index (PPI) are at historic highs in the US, igniting concerns that inflation was gaining momentum.
The situation at hand would have forced the central bank to continue its stringent economic policy that would have delayed rate cuts, adversely affecting the markets.
During the FOMC meeting, Fed officials discussed reducing interest rates on the dollar to 4.6% from its current rate of between 5.25% to 5..5% by the end of 2024. Before the meeting, experts were expecting the first rate cut to occur in June. Based on the CME FedWatch Tool data, there is a 70% probability that at least one rate cut will happen during the FOMC meeting that month.
The policymakers for the world’s largest economy also revised the country’s growth outlook for this year to 2.1%, up from the previous forecast of 1.4% made in December 2023. This highlights a more optimistic view of the US economy’s resilience and potential for expansion.
“Core” Inflation in the US Rise to 2.6%, a Real Concern for the Fed and Markets
Despite the FOMC’s optimism that the economy has scope for growth, the challenging case of inflation persists. The projection for annual “core” inflation, which excludes volatile items like energy and food prices, is slightly up to 2.6%.
The Federal Reserve started its relentless cycle of aggressively hiking interest rates in March 2022 to combat rising inflation and curb the risk of the US economy falling into a recession.
In an interview with CNBC, Owen Lau, the executive director of investment banking firm Oppenheimer, highlighted the inverse relationship between interest rates and Bitcoin’s price. He noted that when the Fed increased interest rates for the first time in 2022, it took out liquidity from the market, negatively impacting the crypto and tech stocks.
However, whenever the central bank cuts rates, it gives liquidity back to the market, which is beneficial to risky assets such as Bitcoin, he added.
“Bitcoin is a bit of everything – sometimes it trades like high beta tech stock,” said Lau.
The apex cryptocurrency’s value declined 10% in a week after hitting an all-time high of $73,797 on March 14th. Despite the downturn, Bitcoin price is still up 53% for the year.
At the time of writing, Bitcoin (BTC) is trading at $66,455 – up over 8% in the last 24 hours.
