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Bitcoin Rallies as Fed Confirms Rate Hike Pause Unlikely

2 mins
Updated by Ryan James
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In Brief

  • The U.S. Federal Reserve announced a 25 basis point interest rate increase at its first meeting of 2023.
  • This latest increase takes the federal funds rate to between 450 and 475 basis points.
  • Powell said that the Open Markets Committee has not seen a sustained slowdown needed to confirm the the success of its quantitative tightening policy.
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The Federal Reserve increased interest rates by 25 basis points on Feb. 1, 2023, taking the U.S. Federal Funds rate to between 450 and 475 basis points.

The latest increase follows a 50 basis point increase in Dec. 2022 and a 0.75% hike in Nov. 2022.

Fed Chair Says FOMC not Swayed by Short-Term Data

While acknowledging the effects of its recent rate hikes on the economic slowdown, Fed Chair Jerome Powell said that the Open Markets Committee would not alter its course until it sees sustained changes to macroeconomic conditions in the U.S.

U.S. Federal Funds Rate
U.S. Federal Funds Rate | Source: Trading Economics

He added that a further rate increase would likely occur at the next FOMC meeting in March, with a pause unlikely in 2023.

“We will need substantially more evidence to be confident that inflation is on a sustained downward path,” Powell stressed. Powell added that continued quantitative tightening would permit slow but positive economic growth in the United States.

After Powell’s speech, Bitcoin fell briefly to below $23,000, while Ethereum fell briefly to $1,556 before surging to above $1,631. XRP behaved similarly, dropping from $0.404662 to $0.398515 before recovering 1.8% to $0.405687. Bitcoin later rallied to almost $23,500 as markets shook off the prospect of further rate hikes in 2023, albeit at a slower pace.

BTC/USD 5 Minute Chart
BTC/USD 5 Minute Chart | Source: TradingView

Equities markets behaved similarly, as the S&P 500 recovered from an initial 1% decline. The Nasdaq rose 1.9% from an initial drop following the Fed announcement. 

Central Bank Likely to Keep a Close Watch on Labor Data

Before the announcement, the Wall Street Journal’s U.S. economic policy correspondent Nick Timiraos predicted that some of the Fed’s influential staff would adopt a broader view rather than being influenced by the recent cooling in prices given by the lower Consumer Price Index and Personal Consumption Expenditure in Dec. 2022.

This view, which looks at whether the economy is operating above or below its capacity, would have focused on the tightness of the U.S. labor market, with the lowest unemployment rate in 50 years. Powell stressed that there are currently more jobs than workers, and wage growth is elevated. Higher wage growth means companies can pass off wage gains to consumers, elevating the final price for the goods or services they provide. 

If wages continue to grow unabated, inflation will continue to remain elevated.

Post-pandemic, mathematical models like the Phillips curve, which correlates rising wages with a drop in unemployment below a certain level, have become less reliable, making it difficult to predict the effectiveness of quantitative tightening. 

Accordingly, the Fed will likely need to continue relying on monthly jobs data to determine the pace and aggression of future hikes.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...