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The Federal Reserve said on Wednesday that it would raise interest rates by a quarter of a percent (or 25 basis points), pushing forward with its campaign to quell inflation despite two of the largest bank failures in U.S. history in the past two weeks.
It raised interest rates to a target range of 4.75% to 5%, mirroring expectations in Fed futures markets, which had penciled in an 88% chance of a quarter-point rate hike, according to the CME FedWatch Tool.
Cryptocurrency prices initially rose immediately after the announcement, pushing Bitcoin to $28,800, a 2.2% gain over the past day, according to CoinGecko. Ethereum ticked past $1,800. Both BTC and ETH have whipsawed in the half-hour since, and stocks are also flat.
Fed Chair Jerome Powell had said earlier this month that interest rates might have to go “higher than previously anticipated,” citing stronger-than-expected economic data during remarks made before Congress.
But expectations of future rate hikes from the Fed shifted as signs of stress emerged in the U.S. banking sector, indicating the Fed could take its foot off the break following the closures of Silvergate Bank, Silicon Valley Bank, and Signature Bank that began on March 8.
The Fed, U.S. Treasury Department, and Federal Deposit Insurance Corporation stepped in to calm uncertainty and prevent contagion, guaranteeing SVB and Signature deposits on March 12. The U.S. central bank also began offering banks loans to help them weather any potential liquidity issues.
Whether the measures are enough to prevent further turmoil among banks is unknown, following the forced sale of Credit Suisse to UBS Sunday and questions surrounding First Republic Bank, which has seen shares plunge more than 87% since March began.
Powell began his remarks on Wednesday by addressing the recent bank failures. He said that the closures could result in tighter credit conditions for businesses and households, but cautioned it’s too early to tell how much they’ll cool the economy in addition to rate hikes. "As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to cool inflation,” he said. “Instead, we now anticipate that some additional policy firming may be appropriate."
Any indication that the Fed will stop raising interest rates or consider cutting them is positive for digital assets, William O’Neil + Co research head Dean Kim told Decrypt. On the other hand, cryptocurrencies could suffer if the Fed remains resolute in keeping interest rates high or pushing them further.
“We’ve been very bullish on Bitcoin and Ethereum, given the fact that we think the rate hiking cycle is about to be over,” he said. “The Fed will have to start cutting in the future.”
The Fed began raising interest rates a year ago when it lifted them from near zero last March. Since then, it has yanked rates aggressively to their highest levels since 2007.
Last year, it delivered four steep rate hikes in a row of 75 basis points, then throttled down to a 50 basis point rate hike last December. The central bank dropped its pace of rate hikes to 25 basis points in January yet insisted that the road ahead would be “bumpy” and that inflation is still not under control.
Though inflation has shown signs of steadily declining since its peak of 9.1% last June—the highest reading in more than 40 years—February’s inflation measure of 6% remains far above the Fed’s target of 2% annually.
By raising interest rates and making it more expensive for businesses and consumers to borrow, the Fed has progressively cooled the U.S. economy to tame rising prices. But as the Fed tightens, it risks causing a recession by raising rates too high or too quickly.
The Fed's rate hikes have made risk assets like tech stocks and crypto less attractive than more conservative investments like U.S. Treasury bonds, which have less potential upside but offer guaranteed returns backed by the government.
Since the failure of Silicon Valley Bank, Bitcoin has surged 44.5% to around $28,800 from approximately $19,900, and Ethereum has climbed 26% to around $1,800 from about $1,400, according to CoinGecko. The market capitalization of all cryptocurrencies has swelled to $1.23 trillion from $964 billion, a 27.5% rise since March 10.