The Federal Reserve recently announced its interest rate decision, keeping the federal funds rate unchanged at 5.25% to 5.55%.
This time, the rate decision announcement was accompanied by an overview of the economic outlook, with the Fed leaving its GDP and unemployment rate forecasts unchanged from its March meeting.
However, the central bank raised its PCE and core PCE forecasts, meaning the Fed now expects higher inflation in 2024. To be clear, the Fed targets PCE inflation, not the inflation rate which gets more attention.
Importantly, the forecast for the federal funds rate in 2024 was raised to 5.1% (with only one rate cut) from 4.6% in March, which implied three 25 basis point rate cuts. This is a major shift in the Fed's economic forecasts and indicates that the central bank plans to take a significantly more hawkish stance than previously expected.
Inflation remains subdued, but economic growth and the labor market are strong, forcing the Fed to keep interest rates high to stave off the economy and ease upward pressure on prices.
Interestingly, the market does not expect the Fed to only cut rates once in 2024. FedWatch Tool
A key question is how the Fed's policy outlook will affect the crypto market. In the first half of the year, the crypto market was not sensitive to fluctuations in interest rates or the Fed's policy outlook. The presence (or absence) of internal factors became important catalysts for crypto. These factors include the launch of spot ETFs, regulatory changes, the emergence of popular coins, etc.
Tight monetary policy can dry up liquidity in financial markets. But that doesn't mean the potential impact will be the same across different markets. Judging by the performance of U.S. stock indexes, high interest rates don't affect the risk appetite of stock investors. But the situation is different in the cryptocurrency market, where traders are cautious due to a lack of strong internal factors.
Currently, the cryptocurrency market is in a consolidation phase. Therefore, a decrease in liquidity in the global market may put some pressure on cryptocurrencies. Speculative coins may be hit the hardest, as they are usually more sensitive to changes in the interest rate outlook.
The cryptocurrency market is structured in such a way that long-term holders are primarily interested in BTC and ETH. Other coins are usually used for short-term speculation. As soon as the inflow of new funds stops, such coins start to lose ground. Meanwhile, the impact of Fed policies on BTC and ETH is less pronounced. Traders should also keep in mind that the emergence of new drivers could push cryptocurrencies to new highs, regardless of the Fed's policy outlook. Such drivers have proven to be more powerful than interest rate changes.
