Federal Reserve Holds Rates Steady; Long-Term Outlook Impacts U.S. Economy and Crypto Market
Summary:
During its September meeting, the U.S. Federal Reserve Open Market Committee decided to retain interest rates at the existing 5.25%-5.5% range but indicated a possible rate hike later this year. Additionally, there was an unexpected revision of its long-term outlook for the Federal Funds Rate, projected to be 5.1% by the end of 2024. This higher-for-longer scenario affected financial markets and drove slight falls in major indices and cryptocurrency values. The data suggests the U.S. economy is reverting to pre-2008 norms of consistent economic growth and inflation. However, investor sentiment currently views these positive economic signs negatively, aligning with crypto market reactions. Future focus should be on the health of companies, and in the crypto world, the viability of the crypto ecosystem. This report further underscores the anticipation surrounding the U.S. Securities and Exchange Commission's ruling on various pending Bitcoin spot ETF applications.
In a move that was highly anticipated, the United States Federal Reserve Open Market Committee opted to maintain interest rates at the existing range of 5.25% to 5.5% during its September meeting. Furthermore, the committee signalled the likelihood of another hike in rates slated for later this year. Fed Chairman Jerome Powell reaffirmed at his press briefing on September 20th that efforts to restore inflation to the Fed's benchmark of 2% are far from over.
A rather unexpected development from the meeting was the upward adjustment in the Fed's long-term outlook for the Federal Funds Rate. They now forecast it to reach 5.1% by the end of 2024, compared with the 4.6% prediction made in June. The rate is then projected to reduce to 3.9% by the close of 2025 and further slump to 2.9% by the end of 2026. These revised figures suggest a more prolonged higher rate scenario than most market watchers had anticipated, causing a slight retreat in markets. In response to the announcement, the S&P 500 index and NASDAQ fell by 0.80% and 1.28% respectively. Symptoms of market discomfort were also observable in the cryptocurrency sphere with Bitcoin dipping below $27,000 and Ether undergoing a nearly 2% decline to slightly above $1,600.
The insights gleaned from the data imply a steady return of the US economy to its pre-2008 financial crisis norm, characterized by consistent patterns in economic growth and inflation. Anticipations of an average US interest rate of around 4% over a three-year period or yearly inflation above 2% would not be extraordinary in such a context.
However, the prevalent mentality among investors - induced by the habit of central banks infusing rapid and costless capital into economies to counter simultaneous crises - interprets favourable economic growth and stable inflation as negative indices. Curiously, the same sentiments extend to the crypto markets, which is intriguing, given Bitcoin was established as a countermeasure to the relaxed financial policies of institutions like the Federal Reserve during the financial crisis.
What the recent developments underscore is the need for investors to veer away from depending on central banks for investment direction. Instead, the general state of companies, the value and quality of their goods and services to consumers should be the focal point. In relation to crypto, emphasis should be on the functionality of the crypto ecosystem and its potential as an alternate or supplemental financial marketplace.
For now, all eyes are on the US Securities and Exchange Commission as it deliberates on an array of Bitcoin spot ETF applications submitted by some of the world's leading asset managers. Putting its weight behind even one application would arguably be a gamechanger for Bitcoin, elevating it to a global asset and opening the door for crypto to be a mainstream investment product during the next bullish run. However, favouring one industry titan over another could lead to some awkward social encounters at high-end soirées in Manhattan's Upper East Side.
Should the SEC hold its ground and reject all proposed applications, Bitcoin and other cryptocurrencies will continue to be perceived as fringe assets. This doesn't rule out the possibility of new variables driving the price toward previous record levels. But until the SEC issue is squarely addressed, we shouldn't anticipate a flurry of activities in the crypto market. The recent FOMC decision and Powell's remarks suggest a period of relative calm on the macroeconomic front. Yet, a return to what could be considered 'old normal' could spell good news for both the global economy and the cryptocurrency markets.
Published At
9/21/2023 7:44:17 PM
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