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The Fed’s Struggle With Inflation and Its Effects on Cryptocurrency


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The US Federal Reserve continues to stick to its unwavering commitment to de-escalating inflation, as evidenced by the recent interest rate increases. The Fed’s efforts to tackle inflation were not without consequences from traditional finance, as risk assets showed a constant response to every interest rate hike.

As the link between Bitcoin (BTC) and traditional finance becomes clearer, these interest rate hikes have also affected the price movement of the leading cryptocurrency, adding to the domino effect in the broader cryptocurrency market. Each of the last eight rate hikes has affected, to varying degrees, Bitcoin price movements and the broader crypto market, including the most recent 0.25% increase.

In March 2022, with the scars of the COVID-19 pandemic still scarred, the Federal Reserve faced the challenge of raising interest rates for the first time in three years. On March 16, the Federal Open Market Committee (FOMC) raised interest rates by 0.25%, marking the first increase since December 2018 and raising the fed funds rate to a range of 0.25% to 0.50%.

Despite the increase, Bitcoin remained unaffected and continued its upward trajectory. On March 16, Bitcoin closed at $41,114, reflecting an increase of 4.18% over the previous day. After a slight decline of 0.48% the next day, the asset saw another increase of 2% on March 18th. Most of the cryptocurrency markets have followed this path.

On May 4, 2022, the Federal Reserve raised interest rates again – the second of the year – and raised the benchmark interest rate by 0.50% basis point. Federal Reserve Chairman Jerome Powell acknowledged the move as a component of the central bank’s initiatives to tackle the rapidly rising rate of inflation.

Despite the interest rate hike, bitcoin closed May 4 up 5%, reaching $39,690 by the end of the day. Unfortunately, the asset’s upside was short-lived, as it saw a significant drop of 7.9% the next day.

This decline was exacerbated by the simultaneous collapse of the Terra ecosystem, which led to a massive 33% drop in the value of Bitcoin from May 5th to May 12th. For a long time materialized across the scene.

The most violent rise of 0.75%

In June 2022, the Federal Reserve implemented the largest rate hike in 28 years, raising interest rates by 75 basis points on June 15. This move was necessary because of the ineffectiveness of previous modest increases in curbing inflation. Unfortunately, this coincided with a bearish mood within the cryptocurrency market, with cryptocurrency lender Celsius temporarily suspending withdrawals due to “extreme market conditions.”

Before the rate hike, bitcoin was showing a downward trend. Surprisingly, when the FOMC announced the 0.75% increase, assets saw a 2% increase. However, this was followed by a drop of 9.66% the next day. Despite another small increase, Bitcoin touched as low as $17,000 on June 18.

A month after raising it in June, the Federal Reserve raised interest rates by 0.75% for the second consecutive time on July 27, bringing the federal funds rate to a range of 2.25% to 2.50%. In response, bitcoin saw its largest single-day increase in three months, gaining 7.99%. The asset posted a further increase of 3.88% the next day before suffering consecutive declines in the subsequent days.

On September 21, 2022, the Federal Open Market Committee issued a statement announcing the third consecutive rate hike by 0.75%. Bitcoin closed the day at $18,461, seeing a decline in value of 2.99%. However, a 5% increase followed the next day. Despite this short uptrend, the asset continued to experience losses for three consecutive days.

In November 2022, despite some favorable economic indicators, the Fed raised the interest rate for the fourth time in a row by 0.75% on the second day of the month, resulting in the highest reference rate seen in 15 years.

The impact on the cryptocurrency market was minimal, as bitcoin ended the day up 1.62% and subsequently increased by 0.28% the next day. While there was a 4.66% increase after that, the FTX stock exchange crash in November eventually sent bitcoin and other digital assets to their lowest levels on November 21. Ethereum (ETH) fell 17% to $1,072 on November 9.

The Fed lowers interest rates

The Federal Reserve made its final rate hike in 2022 on December 14, raising the benchmark interest rate by 0.50% – a less drastic approach, as inflation appears to have subsided. This resulted in the federal funds rate being between 4.50% and 4.75%.

Although the cryptocurrency market showed positive momentum in the days leading up to the announcement, the impact of the rate hike was felt immediately as bitcoin saw a slight increase of 0.16% on the day of the announcement before falling by 2.51% the next day. The asset continued to experience a further decline of 4.17% on December 15th.

Additionally, ETH fell 1% on the day of the FOMC announcement. This drop was followed by another drop of 3.13% the next day. The asset collapsed by 7.87% on December 15, resulting in a drop of $1,166.

The latest FOMC meeting resulted in the smallest rate hike of the past seven adjustments. The Federal Reserve raised its benchmark interest rate by 0.25%, the same rate it started at in March, making this the eighth consecutive increase. The federal funds rate is now between 4.50% and 4.75%.
After the February 1 rate hike, Bitcoin gained 2.63% in value, with Ethereum up 3.55%. However, BTC has since fallen by 3.62% and is currently trading for $22,873. Bitcoin has seen four daily losing sessions since the FOMC announcement on February 1st. On the other hand, Ethereum has fared better, up 3.2% since February 1.

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