Bitcoin price reclaims $59K as Fed leaves rates unchanged
- Federal Reserve has paused interest rates, leaving them unchanged at 5.25%-5.50%.
- FOMC highlights “lack of further progress” toward inflation target in recent months, but is “strongly committed” to returning inflation to 2% target.
- Bitcoin price reclaimed $58,000 area as Fed report improved market sentiment, signaling a more accommodative monetary policy environment.
The market was at the edge of its seat on Wednesday to see whether the US Federal Reserve (Fed) would cut interest rates during the Federal Open Market Committee (FOMC) meeting. It came after a flash crash in the cryptocurrency market that saw Bitcoin price dip below $60,000 ahead of the announcement.
Also Read: Bitcoin price unphased as Fed’s hope for a pivot gets overwhelmed
Fed leaves rates unchanged
The Fed stuck to expectations in the Wednesday FOMC meeting, leaving interest rates unchanged at 5.25%-5.50%, marking a sixth consecutive decision to keep the fed funds rate steady . It also revealed plans to slow the pace of its balance sheet reductions.
So far FOMC press statement = dovish on balance sheet, hawkish on rate guidance. Guiding to holding flat on rates so far though.
— fejau (@fejau_inc) May 1, 2024
Wait for press conference for any guidance on opening door to hikes coming back on the table. If powell dismisses that we're probably in the clear
The decision comes as the economic data has given Fed officials some sort of confidence in where the economy is headed.
Inflation has eased over the past year but remains elevated.
The Fed noted that risks to achieving its employment and inflation goals "have moved toward better balance over the past year," a slight change from the March policy statement, which stated that these risks "are moving into better balance."
The Fed also acknowledged that economic activity continues to expand at a solid pace, with strong job gains and a low unemployment rate.
The highlights of the report include:
- Rate cuts not appropriate until greater confidence inflation is heading to 2%
- Fed notes "lack of further progress" toward 2% inflation goal
- Fed to slow pace of balance sheet runoff starting in June
- Inflation has eased "but remains elevated"
- Job market gains "have remained strong"
- Higher for longer is officially back
The primary lesson here is that the Fed has lost confidence in their fight against inflation, meaning rate cuts may not come anytime soon.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
In the immediate aftermath of the announcement, Bitcoin price reclaimed territory above $59,000. The market had widely priced in a rate hike, following the previous meeting where the Fed’s hope for a pivot got overwhelmed. The pause has influenced a shift in market sentiment.
- A pause or lower interest rates can drive up inflation expectations, making non-inflationary assets like Bitcoin more attractive as a hedge against inflation.
- A pause in interest rate hikes may signal a more accommodative monetary policy environment, which can lead to increased risk appetite among investors seeking higher returns. This could drive investment inflows into Bitcoin and other riskier assets.
- Overall market sentiment tends to improve when interest rates remain stable or decrease, which could translate to more positive price movements for Bitcoin.
Specifically, the market appears to be factoring in a single interest rate cut in 2024, expected in December. At the time of writing, Bitcoin price is trading for $59,210, after an intra-day low of $56,552.
BTC/USDT 1-day chart
Author
Lockridge Okoth
FXStreet
Lockridge is a believer in the transformative power of crypto and the blockchain industry.
