Bitcoin Soars After Fed Reveals 25 Basis Point Hike

The Federal Reserve raised interest rates by 25 basis points on February 1, 2023, bringing the US federal funds rate to between 450 and 475 basis points.

The latest increase follows a 50 basis point increase in December 2022 and a 0.75% increase in November 2022.

Fed chair says FOMC not swayed by short-term data

Acknowledging the effects of recent rate hikes on the economic downturn, Fed Chair Jerome Powell said the Open Market Committee would not change its course until it sees a sustained change in macroeconomic conditions in the US.

US federal funds rate
US Federal Funds Rate | Source: Trading Economics

He said another rate hike is likely at the next FOMC meeting in March, with a pause likely in 2023.

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

Following Powell’s speech, bitcoin briefly fell below $23,000, while Ethereum briefly dropped to $1,556 before rising above $1,631. XRP behaved similarly, falling from $0.404662 to $0.398515 and recovering 1.8% to $0.405687. Bitcoin later recovered to around $23,500 as markets shrugged off the possibility of a rate hike in 2023, albeit at a slower pace.

BTC/USD 5 minute chart
BTC/USD 5 minute chart | Source: TradingView

Equity markets followed suit, as the S&P 500 recovered from an early 1% decline. The Nasdaq rose 1.9% from early losses after the Fed announcement.

Central bank may keep a close eye on labor data

Ahead of the announcement, Nick Timiraos, the Wall Street Journal’s US economic policy correspondent, predicted that some influential Fed staffers would take an accommodative approach in December rather than be swayed by the recent decline in prices given by a lower consumer price index and personal consumption spending. 2022.

This approach, which looks at whether the economy is operating above or below its potential, would have focused on the tightness of the US labor market, with the unemployment rate at its lowest in 50 years. Powell stressed that there are currently more jobs than workers, and wages have increased. Higher wage growth means that companies can pass on wage benefits to consumers, raising the final price for the goods or services they provide.

If wages continue to rise unabated, inflation will remain high.

After the pandemic, mathematical models such as the Phillips Curve, which correlate rising wages with a decline in unemployment below a certain level, have become less reliable, making it difficult to estimate the effectiveness of quantitative tightening.

Accordingly, the Fed will need to continue to rely on monthly jobs data to determine the pace and aggressiveness of future hikes.

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