Bitcoin held at around $38,000 on Tuesday, with most major cryptocurrencies seeing little movement as caution kicked in ahead of a two-day U.S. Federal Reserve meeting. The central bank is widely expected to hike interest rates, marking an end to the easy monetary policy that had boosted crypto assets through 2021.
The meeting will begin later in the day, with a decision and a press conference due on Wednesday afternoon. Chairman Jerome Powell recently said he strongly supports the case for a 25 basis point hike, amid surging inflation in the country. Data last week showed that U.S. consumer prices jumped at 7.9% in February- their fastest pace in nearly forty years.
Rate hike likely to be crypto-negative
Cryptocurrencies are expected to react negatively to the rate hike. A rise in lending rates will reduce the amount of liquidity in the market, and in turn allow for lesser money to be invested into crypto. Higher lending rates also curb the spending power of individual investors, which in turn will dent retail investment in crypto.
Market sentiment has been largely negative ahead of the meeting. Last week, Bitcoin and other assets had retreated after the high inflation reading.
In most instances we’ve seen in recent months, crypto crowds discussing inflation generally leads to an impending downturn. However, regardless of what news comes from the Fed, the age-old suggestion of “selling the rumor, and buying the news” could be applicable here if the crowd fear persists.
-crypto data aggregator Santiment
Fed’s stance on Russia-Ukraine will be watched
A main point of focus in the Fed meeting will be its stance towards the Russia-Ukraine war, which has wreaked havoc across financial markets. The war pushed up oil and food prices, which is likely to cause higher inflation in the United States. This in turn could make the Fed take an even more aggressive approach to inflation.
The Fed had bought rates down to nearly zero due to the economic impact of the COVID crisis. This had flushed the market with liquidity, allowing for more capital flows into crypto assets and boosting them to record highs through 2021. But this had also resulted in rising inflation, a trend seen across most countries that cut rates to combat COVID.
Fears of rising inflation, upcoming rate hikes and more recently, the Russia-Ukraine war, played a key role in crypto’s fall from record highs this year. The space has also tracked declines in stock markets.