Federal Reserve Raises Interest Rates for First Time Since 2007

The Federal Reserve announced a 25 basis point hike, marking the first time the federal funds rate has been raised between 5% and 5.25% since 2007. This decision has come after a series of bank failures, including JPMorgan’s intervention to buy First Republic, Silicon Valley Bank’s sudden seizure, Signature’s following suit, and Silvergate’s voluntary liquidation, which had substantial crypto exposure. This article will discuss the implications of the interest rate hike and the banking crisis, along with the Fed’s response and the market’s reaction.

The Banking Crisis: A Prelude to the Interest Rate Hike

Bank Failures

Over the past few months, the banking sector has witnessed a series of failures. First Republic was seized by regulators, and JPMorgan had to intervene to buy it. Silicon Valley Bank was seized abruptly after comments from the CEO caused a run on the bank. Signature followed SVB’s suit a few days later, and Silvergate, which had substantial crypto exposure, voluntarily liquidated back in March.

Fed’s Response

The Federal Reserve has not included language indicating further rate hikes, suggesting a potential pause. The Fed stated in its May release that, “In determining the extent to which additional policy may be appropriate, the committee will closely monitor incoming information and assess the implications for monetary policy.” In March, Powell stated that it was “too early” to fully comprehend the impact of the banking crisis, and in the May decision, the Fed reiterated that the “banking system is sound and resilient.”

Implications of the Interest Rate Hike

Soft Landing and Lowering of Inflation

Powell has been using the term “soft landing” since the Fed began raising rates to indicate the possibility of lowering inflation without causing an economic crisis or recession. If the Fed begins to lower rates by the end of 2023, the market “has already priced it, and it is very probable that the Fed will achieve a soft landing, and financial markets will continue to grow. If there is any deviation from the plan, the risk of a recession or a longer period of high inflation will be increased, which may result in a market decline,” stated Ruslan Lienkha, chief of markets at YouHodler.

Inflation Target

While inflation has shown signs of slowing, it remains persistently high. The consumer price index’s annual inflation rate revealed that prices increased by 5% for the 12 months ending in March, a slight decline from the 6% reported in February. However, the Federal Reserve aims to bring inflation back to a 2% target rate, which is also the fed funds’ target rate.

Market Reaction

Bitcoin

Bitcoin “is driven by macro events this year, with a +25bps hike priced in, there should be little reaction there,” said Greg Magadini, director of derivatives at Amberdata, a crypto analytics firm. “Guidance around a pause going forward should be bullish for BTC and could send BTC slightly higher (around 29k-30k) but without a surprise, I don’t expect $30k to be meaningfully surpassed.”

Conclusion

The Federal Reserve’s interest rate hike and the banking crisis have raised concerns about the state of the economy and the banking sector. The Fed’s response has been cautious, with a potential pause in rate hikes, and a focus on achieving a soft landing and lowering inflation. The market’s reaction, especially in the case of Bitcoin, is likely to be influenced by the Fed’s guidance going forward.

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