Bitcoin (BTC) slipped below $28,500 after the Federal Reserve raised interest rates by 25 basis points (bps). As widely expected, the Fed’s decision brought the central bank’s key lending rate to a target range of between 5% and 5.25%. The world’s largest cryptocurrency by market cap was recently trading at approximately $28,350, down about 1% over the past 24 hours, according to CoinDesk data.
The increase on Wednesday was the tenth time that the Federal Reserve has raised interest rates in 14 months. The central bank’s Federal Open Market Committee (FOMC) stated that tighter credit conditions for households and businesses would likely have a negative impact on economic activity, employment, and inflation. The Fed also said it would continue to monitor inflation risk.
During a press conference after the rate announcement, Federal Reserve Chair Jerome Powell said that although prices had “moderated somewhat since the middle of last year,” inflation pressures remain high, and there is still a long way to go before inflation returns to the central bank’s 2% target. Powell also reiterated that the decision to halt rate increases was not made at Wednesday’s meeting, but the FOMC’s statement did not signal additional rate hikes as previous ones had. He noted that uncertainty in credit conditions would make the assessment of further monetary policy adjustments an ongoing process, with carefully considered decisions made meeting by meeting.
According to the CME FedWatch Tool, over 93% of traders believe that the Federal Reserve will pause its rate hike cycle at the June policy meeting. Ethereum (ETH), the second-largest cryptocurrency by market cap, rose slightly over the past 24 hours to around $1,878. However, the CoinDesk Market Index (CMI), which measures the overall performance of the crypto market, fell by 1%.
Michael Safai, managing partner of crypto trading firm Dexterity Capital, predicted “mixed outcomes” for crypto traders as a result of the Fed’s decision. In an email to CoinDesk, he noted that while the language on future rate hikes had softened, the central bank maintained that future decisions would depend on macro data, which will likely influence crypto markets. Price conditions have improved, but inflation remains a concern for crypto traders, he said.
“Crypto is quiet right now, which means there isn’t enough exit velocity for the top 10 coins to break out of the macro correlation,” Safai noted. “Bitcoin and Ethereum are more likely to be range-bound until there’s some clue as to where inflation is going. The markets could be in for a bit of a slow summer if the economic recovery is measured.”
Greg Magadini, director of derivatives at crypto analytics firm Amberdata, pointed out in his email to CoinDesk that there would be two Consumer Price Index (CPI) inflation readings before the Federal Reserve’s next meeting in June. These readings will help determine whether another rate hike is on the table. Magadini explained that BTC has been driven by macro events this year, with the Fed’s rate hike already priced in.
Equity markets closed down on Wednesday, with the S&P 500 losing 0.7%. The Dow Jones Industrial Average (DJIA) and the tech-heavy Nasdaq Composite also fell, with losses of 0.8% and 0.4%, respectively.
In the bond market, notes on the 2-year and 10-year Treasury yields declined 12 bps to 3.86% and 7bps to 3.35%, respectively.Crypto investors have struggled to make sense of the potential impact that crypto regulatory fights and recent bank failures could have on the market.
“Bitcoin remains stuck, unlikely to rally above the $30,000 level until the US gains some regulatory clarity,” wrote Edward Moya, a senior market analyst at foreign-exchange market maker Oanda, in a Wednesday note. Crypto data company Kaiko’s chart showed that 2% market depth, a metric for assessing liquidity conditions, for both BTC and ETH are near one-year lows.
Dessislava Ianeva, a research analyst at Kaiko, stated to CoinDesk that despite bitcoin’s more than 70% price increase this year, trading volume on centralized exchanges was lower year on year. Ianeva attributed the drop in volume to “greater macro and regulatory uncertainty.”
“Market makers are still cautious about adding liquidity and have likely revised their risk management strategies,” Ianeva said. She noted that the liquidity gap that materialized after the collapse of exchange FTX and its trading arm, Alameda Research last November, is proving to be persistent.
“Liquidity will hopefully return in time, and critical mass will build in newer areas of the digital asset space. But for now, Bitcoin’s fate seems to remain tied to the broader markets,” said Dexterity Capital’s Safai.
