Today, the U.S. Federal Reserve (Fed) is going to meet and announce a possible interest rate hike of 0.25 percentage points. However, the focus should be on whether there will be a strategy to start to loosen the monetary policy in the next few months. This could definitely have a large impact not only on financial markets but also on Bitcoin, the largest cryptocurrency in the world.
How Could Bitcoin Be Affected by Fed’s Meeting?
Fed’s Chairman Jerome Powell could give signs to the market that they are planning to loosen their monetary policy in the coming months as inflation moves lower and the economy remains strong. At the moment, analysts believe that there could be a 0.25 percentage points increase.
Despite this consensus in the market about what could happen with Fed’s announcement today, there are some things that could affect Bitcoin and traditional financial markets. Generally speaking, when interest rates move higher, Bitcoin becomes affected. When interest rate are high, investors move their funds from risk assets to other safer options such as bonds.
Instead, when interest rates move lower, investments move in the other way. That means that from bonds and safe assets investors will move to risk assets, including traditional financial markets, equity, and cryptocurrencies. This is what we have seen at the end of 2020 and the beginning of 2021 when interest rates move to zero and even negative in some cases.
Quincy Krosby, chief global strategist at LPL Financial said:
“He [Jerome Powell] is on a very tight monetary policy tightrope, where he can’t allow the market to think this is the endgame. It’s prudent for him to be careful. It would be almost reckless for him to have the market believe that they’re just about finished and inflation is where they want it. Inflation is certainly not where they want it.”
After reducing interest rates, central banks realized that inflation was starting to move higher. Indeed, the United States reported an inflation rate of 9.1% in June 2022. This was the largest increase in 40 years for the United States. The same happened in other countries and regions, including the Eurozone.
Many countries in Europe have registered inflation rates of over 20% last year. This shows that low interest rates created a situation in which prices became completely inflated. Money all around the world started to lose value, and people preferred to use money to buy goods and services rather than using it to save.
But what is happening with Bitcoin as the Fed is ready to meet and discuss further steps in terms of monetary policy? According to CoinGecko, Bitcoin remains above $23,000, which is very positive. In the last 24 hours, Bitcoin registered losses of 0.7% and it has a market capitalization of $443 billion.
If we see the Fed announcing a loosen monetary policy in the coming months, then we could see BTC moving higher and strengthening the current bull market. Let’s not forget that Bitcoin was able to surge from $16,500 to over $23,000 in just a few weeks. This strong price increase was related to the possibility of having a more relaxed monetary policy not only in the United States but also in other countries.