Will the Fed Raise Interest Rates?
The crypto market started the critical week with a decline. Although Bitcoin (BTC) reached $30,300 over the weekend, this price movement boosted many altcoins in an upward trend, but the rise was short-lived and gave way to a decline. So, what will the Fed do, and what could be the impact of this decision on the cryptocurrency market? Let’s move on to our article where we try to answer these questions.
According to a survey conducted by Reuters, all 106 economists participating in the survey believe that the Fed will raise the benchmark interest rate by 25 basis points to a range of 5.25% to 5.50% in its interest rate decision to be announced on July 26. The majority still says that this increase will be the final increase in the current tightening cycle.
With the headline Consumer Price Index (CPI) dropping from 4.0% in May to 3.0% in June, there have been comments suggesting that inflation has decreased. Many observers on Wall Street concluded that inflation could soon be brought under control. Some have started to express the opinion that interest rate cuts could happen by the end of the year.
The current debate revolves around whether there is a need for further interest rate hikes to ensure “disinflation” or whether doing more would unnecessarily harm the economy. However, the course of inflation has not changed, and Federal Reserve Chairman Jerome Powell and other central bank officials, despite their decision to pause interest rate hikes at last month’s policy meeting, have stated that further hikes are on the horizon.
On the other hand, the view that interest rates will remain high for a longer period of time seems to be gaining strength. According to the survey conducted between July 13 and 18, the percentage of participants expecting at least one interest rate cut until March 2024, which was 78% last month, decreased to 55% this month. Jan Nevruzi, a US interest rate strategist at NatWest Markets, said, “Despite soft CPI pressure for the Fed, we still expect an increase in July. It is not wise to rely on this from a policy-making perspective while expecting weakness in inflation to continue. We do not want to say that we won the fight against inflation by rushing, as we have seen in the past.”
Economists and market investors still do not seem to agree with the Fed. The latest “dot-plot” projections from the Federal Open Market Committee (FOMC) members, who are the policy-makers for the Fed, show that the benchmark overnight interest rate will peak between 5.50% and 5.75%. However, only 19 out of the 106 economists participating in Reuters’ survey predict that this range will be reached.
Indeed, economists are still concerned that inflation may not decrease fast enough. Among the 29 participants who responded to an additional question in the survey, 20 said that core inflation, which excludes food and energy prices, will either decrease very little or remain slightly below the current level of 5% until the end of the year.
The Fed has set a target of 2.0% for inflation measured by the Personal Consumption Expenditures Index (PCE). The index stood at 3.8% in May. The majority of respondents in the survey do not expect any of the inflation indicators (CPI, core CPI, PCE, and core PCE) to reach 2% until at least 2025. Doug Porter, Chief Economist at BMO Capital Markets, said, “Although recent figures are encouraging, the real battle is starting now because easy base effects are behind us.” He stated that the decrease in inflation in June is partly due to the fact that it was so high in the same period last year.
Since the start of the Fed’s most aggressive interest rate hike process in history, which has been ongoing for over a year, the strong economy and historically low unemployment have repeatedly misled analysts and investors.
Current Situation of Bitcoin and Altcoins
Bitcoin and altcoins started the critical Fed week with a decline. According to CoinMarketCap (CMC) data, BTC is trading at $29,793 with a 0.56% decrease in the last 24 hours. The largest altcoin, Ethereum (ETH), on the other hand, changed hands at $1,871 with a 0.33% decrease during the same period.
The CMC list of altcoins with the most value loss includes Synthetix (SNX) in the first place with a 7.11% decrease, trading at $2.85, Maker (MKR) in the second place with a 6.08% decrease, trading at $1,043, and Compound (COMP) in the third place with a 5.68% decrease, trading at $67.09.
Market analysts and experts state that the crypto market has already priced in the 25 basis point interest rate hike along with the global markets, and the important thing will be the messages that Powell will deliver.
