The Federal Reserve has confirmed that it will raise the federal funds rate by half a percentage point, the largest increase since 2000. Following weeks of uneasiness about the Federal Reserve’s decision in the United States, Bitcoin has surged to $40,000 (R 626k)— up 5% in 24 hours — in what could be a “sell the rumour, buy the news event” scenario.
All of this means that the Fed’s benchmark interest rate is now between 0.75 percent and 1 percent, and it comes as economists struggle to keep inflation under control.
The Federal Open Market Committee stated in a statement explaining its decision:
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity .”
Economists predict that further interest rate increases will be required as the Fed battles to return inflation to its target level of 2%. According to the most recent data, the Consumer Price Index increased 8.5 percent year on year in March 2022, the highest rate since December 1981.
Why is Bitcoin gaining traction?
Interest rate increases are widely regarded as negative for cryptocurrencies. Although they raise borrowing costs, they also provide generous rewards for savers, making riskier assets less appealing when compared to more conventional investments.
Bitcoin’s rise on Wednesday is most likely due to Wall Street’s strength. The tech-heavy Nasdaq closed trading up 3.2 percent, while the S&P 500 gained a similar amount.
This is likely related to Fed Chairman Jerome Powell’s statement that a 0.75 percent rate hike in the future is “not something that the committee is actively considering,” implying that, while rates will continue to rise, the pace will be gradual rather than abrupt.
The Fed’s decision will almost certainly prompt other central banks to raise interest rates as well, and Wall Street’s strong showing on Wednesday will almost certainly be replicated during Thursday’s trading in Europe and Asia.
But, for the time being, Bitcoin’s next significant challenge is breaking through $40,000(R 626k) — a level that has proven elusive in recent weeks.