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Fed Hikes Rates To Highest Since 2007 & Bitcoin Slides To $19k
On Wednesday the Federal Reserve raised interest rates by another 75 basis points, making the third consecutive time this year that central bankers decided on a hike of that magnitude.
This has resulted in the federal fund rates being at their highest since 2007. In the hours after the announcement, BTC fell below $19,000 and continues to waver around that level.
The Fed stated:
“The committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3.25% and anticipates that ongoing increases in the target range will be appropriate.”
This 75 bp raise signals how serious inflationary pressures have gotten in the U.S. The bitcoin market doesn’t like it, either.
Traders are currently betting that the Federal Funds rate will go above 4.25% before central bankers pause the campaign.
Once the terminal rate – still a matter of disagreement among central bankers – is reached, some economists project it will likely stay at that level until inflation comes down significantly, possibly to the Fed’s target rate of 2%. But projections by the Federal Reserve’s own top officials are estimating rate increases through 2023.
“If the Fed remains hawkish, we are likely to see markets test lower lows and remain muted until inflation figures appear to start improving,” Joe DiPasquale, CEO of crypto hedge fund BitBull Capital, said.
Bitcoin teetered in the hours after the announcement, but sold off later in the afternoon along with U.S. stocks. As of this writing, Bitcoin is trading right around $19,000. As recently as last week, it was trading above $22,000.
The Fed’s decision comes after the August consumer price index (CPI), released last week, showed that inflation, excluding energy and food prices, rose 0.6% from the month before.
The worse-than-expected CPI report kindled speculation that the U.S. central bank might raise rates for a full percentage point, or 100 basis points. More recently, the CME FedWatch tool showed that traders were pricing in an 18% chance for a full percentage point hike.
That didn’t happen, though.
“A 1% hike would have been radical and a signal to markets that the country’s central bank has lost control and is in panic mode, and that the likelihood of a recession has just increased considerably,” said Scott MacDonald, chief economist at Smith’s Research & Gradings.
With an increase of 75 basis points, the Fed stays in line with the magnitude of recent rate increases by the European Central Bank and Bank of Canada.
So What Does This Mean For The Future?
Federal Reserve board members and presidents doubled down on further interest rate hikes in their economic outlook, with no pivot in sight for 2023.
“My main message has not changed at all since the Fed’s economic symposium last month in Jackson Hole,“ Powell said during a press conference following the interest rate decision. “The FOMC is strongly resolved to bring inflation down to 2% and we will keep at it until the job is done.”
At the end of this year, the Federal Funds rate is expected to reach 4.4%, indicating the Federal Reserve will continue to raise interest rates at the next FOMC meetings. The Federal Reserve does not expect rate cuts until 2024, damping hopes of eased financial conditions anytime soon.
Powell, speaking about financial conditions, said that “what we think we need to do and should do is move our policy rate to a restrictive level.”
“Today, we’ve just moved probably into the very – the very lowest level of what might be restrictive,” he added.
Traders in traditional markets are already betting that a 75 basis point rate hike is the most likely scenario at the FOMC’s next monetary policy meeting in November. Just one month ago, the odds of a hike of that magnitude were seen as non-existent.
But that’s just how fast things can turn on a dime – no matter what announcements are coming from the Fed. Remember last year when they said inflation would be transitory?
What This Rate Hike Means For Crypto Markets
Crypto markets were volatile in the wake of the Federal Reserve’s decision. As stated earlier, Bitcoin dropped below $19,000 but soon rebounded to $19,500, then slid to $18,900.
Equities also saw wild swings during Powell’s press conference. At the time, the S&P 500 and Nasdaq traded at around where they opened on Wednesday.
“Markets are crazy in the short-term,” said Alexandre Lores, Quantum Economics’ director of blockchain market research. “Over a longer period I see this as a neutral or bearish move, and expect BTC and ETH to respond in a neutral or bearish fashion.”
”This is yet another reminder that crypto moves at the whims of the Fed,” said Riyad Carey, a research analyst at crypto data firm Kaiko. “We saw this just last week when there was a sharper price reduction to the CPI release than to the [Ethereum upgrade] Merge. I don’t foresee crypto, especially BTC and ETH, bucking the Fed’s influence any time soon.”
Joshua Lim, a crypto derivatives trading specialist, said a 75 basis point hike would be “well received,” given that the probability of a larger move was priced in by traders as well.
“With Fed terminal rates in the mid-4% range, one thing we continue to hear is markets’ interest in real-world yields on-chain. This is a growing area, with on-chain credit to electronic market makers being the bulk of it,” he said.
Tether Says New Court Order to Produce USDT Reserve Backing Is A ‘Routine Discovery Matter’
On Tuesday, US District Court Judge Katherine Polk Failla ordered stablecoin issuer Tether to submit “general ledgers, balance sheets, income statements, cash-flow statements, and profit and loss statements” and other documents to the court.
The documents are intended to prove Tether’s claim of the USDT stablecoin being backed 1-to-1 with the US Dollar. The order was passed as a part of a case filed in 2019 against iFinex, Tether and Bitfinex’s parent company.
Following the order, Tether affirmed that the order was part of a routine discovery in court cases and did not by itself substantiate any of the claims listed in the oncoming lawsuit.
“We had already agreed to produce documents sufficient to establish the reserves backing USDT, and this dispute merely concerned the scope of documents to be produced. As always, we look forward to dispensing with plaintiffs’ baseless lawsuit in due course.”
The lawsuit stemmed from October 2019 and was filed by a group of investors alleging that Tether and cryptocurrency exchange Bitfinex engaged in market manipulation by issuing USDT that were not backed by the U.S. dollar with the intention of using them to purchase volatile cryptocurrencies.
Both Tether and Bitfinex have denied the allegations.
Thus far, the plaintiff’s main objectives are to assess the backing of USDT with U.S. dollars and to allow a forensic accountant to evaluate the USDT reserve.
This includes a review of general ledgers, balance sheets, income statements, cash-flow statements, and profit and loss statements relating to Tether’s operations.
At this time, Tether claims it has $68.15 billion dollars of assets (collateral) against $67.96 billion of liabilities (stablecoins), with the vast majority of assets comprising cash and commercial paper.
In the past, the firm has published results of its reserves being audited by independent accountant firms. Tether has recently increased the scope of its stablecoin issuance to the euro, Mexican peso, the Australian dollar and the Chinese offshore yuan.
Iran To Begin ‘Crypto-Rial’ CBDC Trial This Week
According to an announcement from Iran’s Chamber of Commerce, Industries, Mines and Agriculture, the Central Bank of Iran (CBI) is making a pilot launch of its central bank digital currency (CBDC) called ‘Crypto-Rial’ on Thursday.
The CBI stated that crypto-rial was intended “to help improve financial inclusion and function as a powerful tool for the CBI to compete with other stablecoins globally.”
Last month, a draft document was published by the CBI that outlined goals and opportunities for its digital currency.
In that report, the CBI said the goal of the crypto-rial is to turn banknotes into “programmable entities.”
In May 2021, former CBI Governor Abdolnaser Hemmati said the bank had already developed a “primary version” of a digital rial. The CBI’s current head, Ali Salehabadi, said earlier this month that the bank had the necessary infrastructure and rules in place for a CBDC.
Although the country’s government views crypto as a means of circumventing strict U.S. sanctions – even placing a $10 million dollar import order to be paid in crypto earlier this year – the CBI has revealed little about its work on a digital rial, or its function.
Critics say the term “crypto-rial” is a sneaky way to misguide – since Iran’s new digital currency does not have an actual blockchain.
Iran has been undergoing hyperinflation for a number of years as a result of being locked out of the US financial system.
The digital currency is not designed to compete with global cryptocurrencies like bitcoin, according to the CBI’s report.