The U.S. Federal Reserve said Wednesday it would hold interest rates near zero, even as it edges closer to removing some of the extraordinary stimulus provided to financial markets since the coronavirus hit in March 2020.
The benchmark U.S. short-term interest rate will remain in the current range between 0% and 0.25%, according to a statement Wednesday from the Fed’s monetary-policy panel, known as the Federal Open Market Committee, or FOMC.
Crypto traders are monitoring the report because some analysts say bitcoin’s price sometimes moves in response to Fed decisions. A removal of monetary accommodation tends to put downward pressure on prices of assets considered risky, including cryptocurrencies as well as stocks.
“With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed said in a statement after the two-day, closed-door meeting.
The latest Fed decision comes as the central bank already has been winding down its asset-purchasing program – an emergency source of market support that involved creating tens of billions of dollars a month of fresh money to buy Treasury bonds and mortgage securities.
That program is targeted for completion as soon as March, and many traders and economists expect the Fed to start raising interest rates at its meeting that month. That would be the first increase since 2018.
Bitcoin (BTC) was up 2.5% since the decision, trading at around $38,900 on Wednesday afternoon.
While both crypto markets and stocks have swooned recently in anticipation of the move, economists say the Fed might need to tighten monetary policy now to address growing concerns about inflation, the fastest in four decades.
The U.S. Consumer Price Index rose 7% in December from 12 months earlier, the highest since 1982.
While some analysts think of bitcoin as an inflation hedge, experience has shown that it sometimes trades more like a stock – rising when the Fed keeps monetary policy loose, and reversing when the central bank tightens.
Some analysts even suggest that the pressure from the Fed might sap bitcoin returns in 2022 to the extent that crypto traders might be better off holding digital stablecoins pegged to the U.S. dollar.
“One of the main reasons investors might choose stablecoins over cryptos like BTC or others is the lower level of volatility,” said Scott Bauer, a former Goldman Sachs trader who’s now CEO of Prosper Trading Academy.
