- Bitcoin and Ethereum prices decline after the U.S. Federal Reserve signals potential rate hikes to meet its 2% inflation target.
- Market capitalization for cryptocurrencies drops by 1.7%, shedding almost $20 billion, in response to the Fed’s stance.
Cryptos Respond to the Federal Reserve’s Hawkish Stand
Bitcoin, the digital gold standard of the cryptocurrency world, witnessed a dip beneath the $29,000 mark on an early Thursday, mirroring a similar trajectory of traditional stocks. This descent was in direct response to the U.S. Federal Reserve’s reveal of maintaining its hawkish stance on inflation, documented in their August 16 meeting minutes. As a result, Bitcoin registered a 2% dip and settled at a trading price of $28,549.
The Broader Impact on the Market
This downturn didn’t restrict itself to just Bitcoin. The entire crypto landscape felt its ripples, with the global market capitalization recording a 1.7% decrease overnight. To put this in perspective, the crypto realm lost a staggering near $20 billion in value, as per CoinGecko’s data. Ethereum, often referred to as the world’s decentralized supercomputer, wasn’t spared either. Its price struggled to maintain the crucial $1,800 support barrier, eventually dropping 1.5% over the last 24 hours to land at $1,795.
Parallelly, in the realm of traditional finance, the S&P 500 index extended its downtrend from its previous day, marking a decline of 0.76%. Strengthened expectations from the Federal Reserve regarding its rate approach pushed the dollar index (DXY) – which benchmarks the dollar’s strength against major global currencies – up by 0.54% this week, culminating in a one-month peak.
Deciphering the Federal Reserve’s Strategy
The background for these market dynamics traces back to the Fed’s approach to inflation. In their last policy rate assembly, the central bank hoisted its benchmark interest rate to a staggering 22-year zenith, positioning it between 5.25% and 5.50%. This aggressive leap – especially considering it stemmed from a 0% rate in March 2022 – was the Fed’s answer to the spiraling inflation scenario.
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Now, why is this significant for risk assets like cryptocurrencies and stocks? Higher interest rates usually translate to elevated borrowing expenses. This situation impedes growth and discourages expansive ventures, prompting investors to pivot towards more stable avenues, like Treasury bonds. Furthermore, rate hikes emerge as one of the primary instruments at the Fed’s disposal to temper rising consumer expenditures.
However, the narrative doesn’t end there. Insights from the recent meeting minutes unveiled the Fed’s continuous vigilance towards “inflation risks.” Alongside this, they exuded optimism regarding the job market, spotlighting healthy job increments and minimal unemployment. The market’s anticipation of further rate hikes burgeoned post these revelations, with the CME’s FEDWatch tool indicating that traders upped their rate hike predictions from an initial 10% to 13.5% post the minutes’ disclosure.
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