The Fed raised interest rates for the third time in a row, backed by stronger predictions for future hikes, sending the dollar index and fixed income yields to fresh highs. Volatility had increased across all asset classes, causing the ten-year minus two-year yield spread to narrow.
The central bank’s decision was a response to an economy that was growing too quickly and inflation that was starting to rise. The inflation numbers for the past few months had been volatile, but the overall trend was up. And while the fed’s preferred inflation measure, the personal consumption expenditures index, had been running below target, it was starting to move higher.
The fed’s rate hikes have been accompanied by a gradual unwinding of its massive bond-buying program, which has helped to push up rates. The central bank has been gradually reducing its monthly purchases of Treasury securities and mortgage-backed securities, and it is widely expected to announce another reduction at its next meeting in December.
The fed’s rate increases have also been accompanied by a strengthening of the dollar, which has risen to its highest level in more than two years. The dollar’s strength has been a headwind for US exports and has contributed to the decline in oil prices.
The central bank’s decision to hike rates was widely expected, but the size of the rate increase was larger than expected. The fed had been widely expected to hike rates by a quarter point, but the central bank decided to go for a larger move in order to head off inflation.
The fed’s rate hike will be felt across the economy, with higher rates likely to lead to higher borrowing costs for consumers and businesses. The central bank’s decision will also have an impact on the stock market, which has been volatile in recent weeks on fears of higher rates.
How Higher Interest Rates Could Impact Bitcoin Prices
When the Federal Reserve raises interest rates, it’s usually bad news for Bitcoin. That’s because a higher cost of borrowing tends to weighing on economic activity and riskier assets like cryptocurrencies.
Here’s a look at three ways higher rates could affect the cryptocurrency.
1. A strong dollar
One key effect of the Fed’s rate hike is a stronger dollar. That’s because when rates go up, investors tend to move money into dollar-denominated assets in search of higher returns.
A stronger dollar is generally bad for Bitcoin. That’s because Bitcoin is priced in dollars and a stronger dollar makes Bitcoin more expensive for buyers using other currencies. What’s more, a lot of Bitcoin trading takes place in China, where the yuan has been falling against the dollar. So a stronger dollar makes Bitcoin even more expensive for Chinese buyers.
2. Less demand for Bitcoin
A stronger dollar and higher interest rates could also lead to less demand for Bitcoin. That’s because when rates go up, investors tend to move money into assets that offer a higher yield, like bonds.
What’s more, higher rates could lead to a drop in demand for Bitcoin as a safe haven asset. That’s because when rates are rising, it’s generally a sign that the economy is doing well. And when the economy is doing well, investors are less likely to seek out safe haven assets like Bitcoin.
3. More regulation
Finally, the Fed’s rate hike could lead to more regulation of Bitcoin. That’s because when rates go up, it makes it more expensive for investors to borrow money to buy Bitcoin
That could lead to more regulation of Bitcoin exchanges and other businesses that deal in the cryptocurrency. That’s because when it’s more expensive to buy Bitcoin, there’s less incentive for investors to do so, and more incentive for regulators to step in.
Conclusion
The Fed’s rate hike will have an impact on Bitcoin, even if it might not be immediately obvious. A stronger dollar, less demand for Bitcoin, and more regulation could all be in the offing. So while Bitcoin might have held up relatively well so far, the Fed’s rate hike could still be a major headwind for the cryptocurrency in the months ahead.
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