The US Federal Reserve (Fed) stated that with inflation at a high level and strong labor markets, it believes it is appropriate to increase the federal funds rate target range. The Fed decided to keep reducing the monthly pace of net asset purchases. They came to an abrupt halt in March.
The new statement leaves out key details from the previous statement, such as the Fed’s commitment to “using its full range of instruments to support the US economy”.
Fed noted that it is prepared to adjust its stance on monetary policy if necessary, should any risks arise that might hinder the achievement of its goals.
Jerome Powell, Fed Chair, was asked about the current high level of inflation in the US at the press conference after the release. Powell stated that they will use their tools to ensure that higher inflation does not become “encroached.” He also suggested that the Fed may raise rates in March.
After rallying immediately after the statement, both Bitcoin (BTC) as well as Ethereum (ETH) fell sharply shortly thereafter.
BTC was trading at USD 37.112 at 20:50 UTC and was unchanged for a day. ETH was at USD 2,505 at USD 2.505 and was up 2% per day.
At 20:45 UTC, however, the tech-rich Nasdaq stock market index fell by 3.34%, while the S&P 500 index suffered a 2.1% decline since the release.
Michael Schumacher, Wells Fargo rates strategist, commented on the Fed’s statement. He said it was “innocuous” and added that people are “taking this as a fairly middle-of-the road statement, not a lot of digestible,” CNBC reported.
“The stock market is particularly vulnerable to higher rates, and the removal of a tailwind that Fed’s asset purchase have provided for two years,” Chris Zaccarelli said, per. He said that while the economy will not enter recession, and the bullish stock market will continue, volatility could increase in the months ahead.
Analysts expected the Fed to confirm that interest rates will rise in March, ahead of today’s release.
In a note, the European financial services company Nordea stated that “We see the Fed building toward a March increase, while at the same time creating flexibility.” The statement said that speculation about a 0.5% increase should be dismissed and that it doesn’t expect a faster pace for tapering announcements.
The bank stated that this could provide a temporary market relief.
To comment on the reaction of the market to this statement, George Selgin (an economist at the libertarian think tank the Cato Institute) wrote on Twitter that he doesn’t expect “modest” tapering will have any significant impact.
“Tapering is the latest market problem. Selgin stated that, contrary to actual rate hikes and modest changes in Fed’s balance sheets, these minor adjustments shouldn’t have any significant consequences.
Others suggested that the market might not respond so calmly to the Fed’s words. Steven Van Metre , a fund manager, wrote that the Fed is currently focusing on controlling inflation, which implies that market reactions will be secondary.
Van Metre stated that the President and Congress had told Jerome Powell (Fed chair) to lower inflation, and that he would do it.
Commenting on the Wall Street Journal earlier this day, Luca Paolini (Chief Strategist at Pictet Asset Management) said that all eyes will be on the Fed today and that the tone of today’s press conference will be just as important as its content.
It’s not so much about the tone of the conference. The strategist stated that people may expect the Fed to tone down its rhetoric in light of the market turmoil and geopolitical tensions.
Finally, considering that crypto markets have fallen substantially from their peak last year, Arthur Hayes, the former CEO of BitMEX, wrote in a blog post Tuesday that bitcoin seems tempting below USD30,000, regardless the tone of the Fed’s statement.
BTC has a resistance level around USD 28,500. ETH will have a resistance level at USD 1,700, according to the former CEO.
“I don’t believe there is a bottom, until these levels have been retested. Amazing if the level holds. This prong has been fulfilled. Hayes predicted that if it does not, then a mega liquidation candle would occur in the USD 20,000-USD 28,500 range for BTC or the USD 1,300-USD 1,700 range of ether.