Fed’s Recent Rate Decision
Last week, the Federal Reserve (Fed) announced its decision to maintain the interest rate at 5.25% – 5.5%. This move, while expected, raises questions about the potential consequences for various markets, including cryptocurrencies.
Revised Economic Forecasts
In addition to the rate decision, the Fed released updated economic forecasts. The most notable change was the revision of the projected interest rate for the end of 2024. The forecast increased from 4.6% (three reductions of 25 basis points each) projected during the Fed’s March meeting to 5.1% (one reduction of 25 basis points) projected in June.
Inflation and Economic Growth
Persistent inflation, robust economic growth, and a strong labor market in the US have compelled the Fed to maintain higher interest rates to cool down the economy and curb price increases.
Market Reactions and Expectations
Interestingly, the market seems skeptical of the Fed’s stance, betting on two 25 basis points rate cuts by the end of this year. This divergence in expectations prompts the question: How will this impact the crypto markets?
Crypto Market Sensitivity to Interest Rates
This year, cryptocurrencies have shown limited sensitivity to interest rate fluctuations. Internal drivers, such as the launch of spot ETFs, regulatory changes, and the emergence of new popular coins, primarily influence the crypto markets.
Liquidity and Fed’s Policy Impact
Nevertheless, a stricter policy from the US central bank could dry up liquidity in financial markets. While the US stock market has shown little concern over the Fed’s tight policy, cryptocurrencies might feel the impact of higher interest rates more acutely, especially in the absence of strong internal drivers.
Consolidation Phase in Crypto Markets
Currently, crypto markets are in a consolidation phase, meaning reduced liquidity could put pressure on more speculative coins. The market dynamics show that long-term holders are focused on accumulating Bitcoin (BTC) and Ethereum (ETH), while other coins are mainly used for speculation. When new money flow slows down, these speculative coins come under pressure, whereas BTC and ETH are less affected by the Fed’s policy.
Importance of Internal Drivers
It’s important to note that significant internal drivers are far more crucial for cryptocurrency markets than interest rate fluctuations. For instance, the approval of spot ETFs for ETH and other coins in the future will have a more substantial impact than any changes in the Fed’s policy.
