TL;DR Breakdown:
- The Federal Reserve increases interest rates for the first time since 2018.
- Interest rates will increase by 0.25% with a further hike in projection.
- Increasin rates could drive investors out of risk assets like crypto.
The US Federal Reserve is raising interest rates for the first time in the last 4 years. The federal funds rate is likely to increase by 0.25% (25 basis points). The interest rate hike comes as a result of the worst inflation of the century.
The feds aim to increase the interest rate to address the ongoing price hikes. Rising interest rates increase credit expense, meaning that loans and short-term borrowings become more expensive. However, it drives the rate on savings accounts, thus lowering consumers spending power. With few buyers in the market, sellers are driven to lower prices and causing inflation to go down.
Although the higher interest rates will help the consumer price index, it might bear bad news for crypto and other risk assets.
Federal Reserve’s decision might impact Bitcoin and crypto investments
A higher interest rate means lower returns on investment. This will make risk assets less attractive to investors. Experts predict the Federal interest rate to increase further this year, which might cause a short-term max exit from risk asset investment. Large-scale sellouts could result in another crypto market crash, as we have seen multiple times since November 2021.
Shortly after the news on Wednesday, Bitcoin prices dipped to $39k. However, BTC has rallied back up to its $41k support level, as Ethereum and other altcoins are also considerably up in the last 24 hours.
The feds have kept the interest rates close to zero for the last 2 years to combat the economic impact of Covid-19. However, with inflation soaring high, the rising interest rates are a dying cry from the Central Bank to control the CPI. Further hike in interest rates could cause investors to leave risk assets like crypto.
