The Federal Reserve "stays on hold", Bitcoin tests the $27,000 support

On the afternoon of September 20th, Eastern Time, the Federal Reserve announced that it would maintain interest rates at current levels. This decision was the second suspension of interest rate hikes since it began raising interest rates in March 2022, which was in line with market expectations.

The Fed wrote in a statement that a continued slowdown in the labor market and tighter credit conditions led the committee to make the decision.

Crypto markets were largely flat following the announcement, with Bitcoin holding around $27,200 in the minutes following the central bank’s announcement before briefly falling by around 1% to $26,900 before rebounding again above the $27,000 support level at press time, while Ethereum was down just under 1%.

Bitcoin has gained about 3.5% over the past month, while Ethereum prices have struggled to break through, falling about 3% over the past month and about 6% over the past six months.

The S&P 500 and Nasdaq Composite Index closed down on the day, with the Dow Jones Industrial Average closing down about 76 points, the Nasdaq closing down 1.5%, and the S&P 500 closing down 0.94%.

Powell Speech

BitPush previously reported that the Federal Reserve has raised interest rates in the most aggressive manner in the past 18 months, raising rates 11 times in a row from March to July last year, aimed at easing the country's highest inflation in more than four decades.

However, market concerns about whether a soft landing can be achieved remain. In a subsequent press conference, Federal Reserve Chairman Jerome Powell warned that inflation still has a long way to go to reach this goal. He said: "The U.S. banking system is sound and resilient, and tighter credit conditions for households and businesses may affect economic activity, employment and inflation. The extent of these effects remains uncertain."

Powell does not want to send a signal to investors that the rate hike has been completed. He reiterated that the upcoming economic data will provide information for the central bank's decision, and said: "We never intend to send a signal on the timing of any rate cut. There will be a time to cut interest rates at the appropriate time. There is still too much uncertainty. When entering 2024, the Fed will consider policy lags and data."

Rate hike forecast

A new batch of quarterly projections showed 12 of the 19 committee members expecting another quarter-point rate hike this year, while seven others saw no need. That would raise the federal funds rate to about 5.625%, within a range of 5.5% to 5.75%.

The split between hawks and doves was little changed from June, when 12 of the 18 committee members expected further rate hikes from current levels.

For 2024, the median year-end forecast for the Fed's key interest rate jumped to 5.1% from 4.6% in June. As early as June, eight members expected the Fed's key interest rate to eventually reach 4.875% or higher; two members expected the interest rate to be 4.625%; and eight dovish members expected the Fed's key interest rate to fall to 4.375% or lower.

Here's how the views have shifted from the September forecast: Now, 10 members see the year-end rate at least 5.125%. Another four members see the rate at 4.875%; and five members see the year-end rate no higher than 4.625%.

Fed officials also expect interest rates to remain around 5.1% next year, a sharp increase from the 4.3% forecast in June. They also expect stronger economic growth this year, with real GDP expected to increase by 2.1%, compared with the 1% forecast in June.

Impact on risk appetite

YouHodler head of markets Ruslan Lienkha believes that a pause in interest rates is unlikely to spark bullish sentiment in risky assets.

“Even if we keep the same interest rates until the end of 2023, fixed income yields will continue to grow, which will exacerbate the situation for risk assets,” Lienkha said in an interview with The Block , adding that the current target rate of 5.5% has not yet been fully reflected in the market and the current interest rate will affect the market for at least a few months.

Analysts are optimistic that the Fed will keep its key interest rate in a range of 5.25%-5.50% through the end of the year.

James Butterfill, head of research at CoinShares , commented that as the Federal Reserve becomes increasingly dovish, interest rates will be cut by about 75 basis points in 2024.

David Wells, CEO of Enclave Markets , said that confirmation that the rate hike cycle may be over is a positive sign for the market. He said in his tweet: "Bringing certainty to the market by pausing interest rates may be a positive sign for overall sentiment and may increase interest in risk assets in the short term."

Butterfill believes that the impact of high interest rates will put increasing pressure on the economy in the coming months. He added that this will make it more difficult for the Federal Reserve to maintain a hawkish monetary policy stance. He said: "Looking ahead, as high interest rates become increasingly stressful on the economy, the prospect of further rate hikes will weaken, which may support Bitcoin ."

Market research firm Asgard Markets expects some profit-taking after the Fed decision. "Positioning and sentiment are not as light or heavy as earlier this year, and there are not many new catalysts on the horizon, which means that 'in-the-money' players will give up some positions and re-evaluate," the firm said in a report.

The Federal Open Market Committee (FOMC) is scheduled to meet again on October 31 and announce its next interest rate decision on November 1. This means that September consumer price data, expected to be released on October 12, will be particularly important in determining the central bank's next move. According to CME's FedWatch tool, investors currently expect a roughly 70% chance of keeping interest rates unchanged at the November meeting.