Federal Reserve Holds Interest Rates Steady
The Federal Reserve has decided to maintain its benchmark interest rate, opting to pause its recent series of cuts after implementing three consecutive reductions. Following this announcement, Bitcoin experienced an initial drop before rebounding to reach its highest value in three days. The Fed’s decision, anticipated by many traders, keeps the federal funds rate within a target range of 4.25% to 4.50%. When the Fed initiated its easing measures in September, rates were significantly higher, at a peak not seen in 23 years.
Fed Chair Justifies Policy Decisions
Fed Chair Jerome Powell stated that the current policy adjustment is justified in light of progress made regarding inflation and improvements in the labor market. He emphasized that there is no urgency to change the policy stance. The decision to cut interest rates usually favors riskier assets such as stocks and cryptocurrencies, as it lowers borrowing costs and stimulates economic activity. The Fed’s focus has shifted toward supporting the labor market, placing less emphasis on curbing inflation.
Cautious Outlook Amid Economic Strength
During its December meeting, the Fed adopted a more cautious perspective. Notably, the central bank indicated that the risks associated with inflation have increased amidst signs of economic resilience in the U.S. This cautious stance was further fueled by the political landscape, particularly with the new administration under President Donald Trump, which may complicate efforts to maintain inflation at a target 2%.
Revised Rate Cut Projections
At the December gathering, the Fed revised its expectations for rate cuts, now projecting only two quarter-point reductions for the year, a decrease from the previously estimated four cuts. On Wednesday, the Fed refrained from releasing updated economic forecasts, citing uncertainties in the economic outlook.
Bitcoin’s Price Reaction
Following the Fed’s announcement, Bitcoin’s price initially dipped from approximately $103,000 to around $101,400 in less than thirty minutes. However, it quickly recovered, climbing to about $103,800—the highest level since Sunday. The Fed’s decision to pause rate cuts coincided with pressure from Trump, who advocated for lower interest rates at the World Economic Forum in Davos.
Inflation Trends and Economic Indicators
Powell declined to address Trump’s remarks during a press conference, stating that it would not be appropriate for him to do so and noted that he had not communicated with the president since his recent inauguration. Inflation has significantly decreased since its peak of 9.1% in 2022, landing at 2.9% for the twelve months leading up to December, as per a recent government report. This decline has alleviated some inflation concerns, especially following a strong jobs report.
Market Expectations and Future Possibilities
As Bitcoin’s value fell below $90,000 about two weeks ago, some analysts speculated that the Fed’s easing measures might be concluded, citing the strength of the U.S. economy. Ahead of the Fed’s decision on Wednesday, traders estimated a 28% likelihood of a rate cut occurring in March, according to CME FedWatch. During the press conference, Powell indicated that the current effective federal funds rate of 4.3% is aiding the committee in achieving its objectives. He suggested that if inflation continues its downward trend, rate cuts could still be a possibility.
Inflation Measurement and Expectations
The personal consumption expenditures price index, which serves as the Fed’s preferred measure of inflation, recorded a 2.4% annual increase in November. A new report expected to be released Friday is projected to show a 2.6% annual rise in this index, according to Trading Economics.
