As was expected, the FED opted for a 75-basis-point interest hike to gain control over inflation.
The Federal Reserve (FED) announced it will increase interest rates by 75 basis points. The interest announcement was made during the Federal Open Market Committee Meeting (FOMC Meeting) at 2 pm on July 27.
The move marks the biggest rate hike that the agency has made since 2019, showing how serious inflation is at the moment. If the wake of the move, cryptos, gold, and stocks moved up.
It looks like higher rates mean higher asset prices!
The FED Lost Control
Over the last few years, The FED usually only raised interest by 0.25%. In the meantime, the target range of FED funds officially lifted to 2.25% and 2.5%, the largest rate since the beginning of the pandemic.
This is, however, unlikely to be the last hike. Many expected that FED would change policy and boost economic growth facing the potential recession after the 0.75% increase.
But it’s noteworthy that inflation is now the agency’s priority and it would probably sacrifice financial growth to fight against inflation.
FED’s Chair Jerome Powell even stressed during the meeting that it anticipates ongoing increases:
“While another unusually large increase could be appropriate at our next meeting that is a decision that will depend on the data we get between now and then.”
The point here is the data we get between now and then. What is that data?
Bad Data Boosts Prices
The interest rate decision came before the GDP report which will be released July 28 and of course the PCE inflation index set to be here on Friday.
The U.S. Bureau of Labor Statistics revealed in June that the country’s inflation hit 9.1%, a 40-year record rate despite many interest rate hikes. The CPI key components including gasoline, shelter, and food price have not shown any signs of cooling down.
The FED is on a mission to pull inflation back to the 2% target.
Since the bank insists that increased demand was the root cause of inflation, ongoing hikes are a sure bet from now until at least the end of the year. And it will eventually lead to the inevitable consequence – recession.
US President Joe Biden expressed optimism on July 26 that the world’s largest economy will not enter a recession, despite the fact that Gross Domestic Product (GDP) figures that are expected to be released this weekend may show contraction.
Crypto Market Reaction
Shortly after the interest rate hike was announced, the cryptocurrency market went green. The largest cryptocurrency increased by more than 8% in the last 24 hours, while Ethereum increased by 16%.
The following top digital currencies are also increasing. Prior to the FOMC meeting, the crypto market cap fell below $1 trillion, indicating that the market is under increasing selling pressure.
Many people predicted that the price of Bitcoin would fall below $20,000. Bitcoin is currently worth around $23,000 USD.
The crypto market is getting more and more regulatory scrutiny.
Specifically, the U.S. Securities and Exchange Commission (SEC) has stepped up measures following incidents in the cryptocurrency market and bankruptcies filed by several money-lending companies – the latest events to hit the market.
The SEC is also investigating cryptocurrency exchange Coinbase over its alleged listing of security tokens.
The crypto market has been rocked by a surge of negative news since May 2022, following the collapse of Terra (LUNA). With increased price volatility, the latest crypto fear and greed index indicates that overall market sentiment is negative.
The CEO of Galaxy Digital Holdings, Michael Novogratz, has ruled out the possibility of Bitcoin breaking new highs this year.
FED rate hike will leave an impact on cash flow, according to Novogratz, and investors will not be willing to pump a large amount of liquidity as they did during the pandemic.