All eyes are on the Fed this week after the chairman of the Fed announced that they would indeed be raising interest rates again.
Does this mean that the Bitcoin rally means less than we thought, or what is really happening behind the scenes as more regional banks fall behind?
The U.S. Federal Reserve has once again raised interest rates in an effort to curb inflation. The crypto market had a mixed reaction to the hike.
The interest rates reached the highest levels in 16 years after the central bank raised its benchmark rate a quarter percent to 5.1%.
Stocks Sink, but Crypto Has Mixed Reaction
In the last 24 hours, Bitcoin and Ethereum have gained 2% after a minor dip post-announcement. Other major altcoins remain muted on the hourly charts. The broader market largely looks unchanged after a short pullback.
The decision is the result of the still high inflation, which has slowed down in the past months. Consumer inflation in the U.S. decreased in March but remained at 5%. The year-over-year rate is significantly less than the 6% seen in February.
Experts interpret the 25 basis point increase, which brought interest rates to their highest level in 16 years, as a hint of a potential pause at the next meeting.
Some analysts previously predicted that the Fed would pause its exercise to tighten monetary policy amid a banking crisis.
Quotes from Fed Governors & Jerome Powell
However, in a recent review by the Board of Governors of the Federal Reserve System, the Silicon Valley Bank’s failure was pinned on ‘mismanagement.’ Moreover, the review called the U.S. banking system “sound and resilient, with strong capital and liquidity.”
Federal Reserve Chair Jerome Powell touched upon the crisis in a press conference following the interest rate hike. He said,
“The run on Silicon Valley Bank was out of keeping with the speed of runs through history. And that now needs to be reflected in some way in regulation and in supervision.”
However, economists are concerned that ten rate hikes in one year may cause the economy to slow down or even trigger a recession. Regional U.S. banks may be exposed to systemic risks as a result of the increase.
A recent report highlights that the uninsured depositors at the roughly 190 regional banks are still withdrawing money, stressing the system. This could be a possible reason the crypto markets didn’t take the news too badly.
Rate Hikes Affect Regional Banks & Crypto
The crypto market has shown an increasing correlation with the US equities market. This trend may be influenced by the FOMC’s consistent raising of interest rates over the past year.
Around Fed interest rate decision time, the correlation between these two sectors tightens.
Higher interest rates lead to increased borrowing costs, reducing consumer and investor spending. This can negatively affect equity markets and, in turn, reduce demand for cryptocurrencies.
On the other hand, lower interest rates can increase spending, stimulate economic growth, and positively impact both equities and cryptos.
Market analysts closely monitor the Fed FOMC decisions and their impact on the broader economy and financial markets, including the cryptocurrency sector.
Moral of the story: they are absolutely connected, even though a small minority in crypto would like to think they are not. We live on Earth, not the great crypto island of the Bahamas.