Market Wrap: Crypto Markets Trade Higher as Fed Raises Rates by Expected Amount

Bitcoin’s (BTC) price rebounded on Wednesday, rising 2% in early morning trading and soaring over 10% following the announcement by the Federal Reserve that it was raising interest rates by 0.75 percentage point.

Much of the talk on Wednesday in both cryptocurrencies and traditional financial markets revolved around the Fed. Its rate hike matched expectations.

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The Fed “dot plot,” which is the projection of each Fed’s official's prediction for the federal-funds rate, implies that the rate will increase to 3.5% by the end of this year. The Fed has three more meetings this year (September, November and December).

In traditional equity markets, the S&P 500 and the tech-heavy Nasdaq climbed 1.34% and 2.44% respectively as investors viewed the rate increase positively. The Dow Jones Industrial Average rose by less than half a percentage point.

Ether’s (ETH) price rose 16% on the day, partly on the rate decision. Meanwhile, the Ethereum blockchain successfully implemented a “shadow fork,” or test software update, two days earlier than expected. The test puts Ethereum a step closer to its much anticipated shift from a proof-of-work network to a more environmentally friendly proof-of-stake one.

Altcoins traded higher on Wednesday, as well, with MATIC rising by 9.3% (following the prior day’s 11% decline) and SOL jumping by 5%.

By Glenn Williams Jr.

Bitcoin rebounded in Wednesday trading, following a rate increase by the Federal Reserve that markets largely anticipated.

In light of the 75-basis point hike by the Federal Open Market Committee, the U.S. central bank’s comments on May 4 about the size of its balance sheet are particularly noteworthy.

“We intend to significantly reduce the size of our balance sheet over time in a predictable manner by allowing the principal payments from our securities holdings to roll off the balance sheet, up to monthly cap amounts,” the Fed said at the time.

The monthly cap was $30 billion for Treasurys and $17.5 billion for mortgage-backed securities. One interpretation of the Fed’s statement in May suggests that the Fed's balance sheet would decrease by $47.5 billion each month. As shown in the chart below, however, that hasn’t been the case, as the balance sheet size remains at about $8.9 trillion.

Additionally, the $47.5 billion amount is labeled a cap, and not a target, and so the reduction of the balance sheet will occur as Treasurys fully mature and subsequently drop off of the balance sheet. Investors may also consider Fed Chairman Jerome Powell’s statement that:

“Our balance sheet decisions are guided by our maximum employment and price stability goals. And in that regard, we will be prepared to adjust any of the details of our approach in light of economic and financial developments.”

Ultimately, the Fed has the goals of price stability and maximum employment in mind, but also has to determine the pace and manner in which it achieves those objectives.

The Fed’s policy affects risky assets like stock and cryptocurrencies. As seen in the chart below, the correlations between BTC, the S&P 500 and the Nasdaq Composite remain tight.

On a technical basis, the increase in BTC prices came in conjunction with a sharp uptick in RSI (relative strength index) to 56, which indicates increasing momentum.

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