Summary
- The Federal Reserve increased its benchmark interest rate by 25 basis points, bringing it to a range of 3.75% to 4%, marking its first hike since 2023. Traders had anticipated a 93% probability of this move, according to CME's FedWatch tool.
- This decision received unanimous support from all Fed Governors.
- In the wake of the announcement, Bitcoin experienced a brief surge.
On Wednesday, the Federal Reserve raised interest rates by a quarter point, adjusting the federal funds rate from 3.50% to 3.75%, with the new target range set between 3.75% and 4%. This marks the first increase since 2023.
Prior to the announcement, Bitcoin's price fluctuated between $75,000 and $75,800, remaining stable. However, shortly after the Fed's decision, Bitcoin's value jumped to $76,000 and has continued to rise. Meanwhile, the overall cryptocurrency market saw a decline of approximately 2.18% for the day.
The rate increase was largely anticipated by the market, as traders had assigned a 93% likelihood to this outcome before the announcement, a significant rise from under 50% just a month prior. All 12 members of the Federal Open Market Committee supported the hike.
In their official statement, the Committee noted that economic activity is "expanding at a solid pace" and that job growth has "kept pace with the workforce," while also acknowledging that inflation remains high. They stated that the recent rate increase would facilitate a "timelier return" to their 2% inflation target.
This rate hike aligns with findings from a Wall Street Journal survey published earlier this week, which indicated that nearly all major banks anticipated an increase, with most, including Barclays, Citigroup, JPMorgan, Morgan Stanley, and UBS, predicting a total of 50 basis points of tightening by the end of the year. Bank of America, Deutsche Bank, and RBC had projected a more aggressive 75 basis points increase.
Rationale Behind the Fed's Decision
The urgency for this rate hike intensified following last week’s inflation data. The Producer Price Index (PPI) rose by 5.4% year-over-year in August, up from 4.8% in July, with a monthly increase of 1.1% primarily driven by rising energy costs, according to the National Association of Manufacturers (NAM).
Shortly after, the Consumer Price Index (CPI) showed a 3.4% annual increase, consistent with July's rate, but the monthly increase accelerated to 0.4%, up from 0.1%, with gasoline prices accounting for one-third of this rise. Core inflation, which excludes food and energy, also increased to 0.3% from 0.2% monthly.
This combination of factors prompted several banks, including Goldman Sachs and Piper Sandler—previously expecting the Fed to maintain rates—to adjust their forecasts to anticipate a hike after the inflation reports were released, as reported by Reuters. Additionally, oil prices exceeding $100 per barrel for the first time since July, exacerbated by the conflict with Iran, added further pressure on the Fed to act.
Having kept rates steady at 3.50% to 3.75% in July, a decision that was narrowly passed with a 9-3 vote, the internal division among policymakers, coupled with a stronger-than-expected jobs report in August, nudged the committee toward tightening measures.
Implications for Warsh and the Administration
This rate hike places Fed Governor Warsh in a challenging position. Wednesday's meeting was only his third since being confirmed in May, and it contrasts sharply with former President Trump’s desire for rate cuts when he nominated Warsh. Trump had previously stated, "I'm going to put somebody that wants to cut rates," and also urged Warsh to act independently.
Interestingly, Warsh has managed to fulfill both expectations: maintaining independence while opting for a rate increase.
Senator Elizabeth Warren, a critic of Warsh’s independence from the White House, remarked to CNN that Trump’s policies regarding Iran and tariffs had effectively cornered the Fed chair, forcing a choice between adhering to the administration's wishes and addressing inflation. She contended that a rate hike would ultimately burden average families with increased credit card debt and mortgage costs, regardless of Warsh’s direction, and stated it would take more than one decision to change her perception of him.
In the lead-up to the decision, Trump, Vice President JD Vance, and Treasury Secretary Scott Bessent had all publicly advocated for lower rates, with Trump even suggesting a halt to trade with countries running surpluses with the U.S. if rates did not decline.
Impact on Bitcoin and Other Cryptocurrencies
The cryptocurrency market was already under pressure before the Fed's announcement. Bitcoin was trading around $75,200 just hours before the decision, significantly lower than its September peak of nearly $82,000 and still recovering from a decline following the failed Senate vote on the Clarity Act.
Analysts had identified a support range between approximately $73,500 and $75,600, indicating that a daily close below this range could lead to a drop towards $71,000 or even $66,900, which might reverse the golden cross that had driven Bitcoin's summer rally.
Upon the announcement, Bitcoin tested this crucial support zone, initially spiking toward $75,900 before retreating to around $75,100 within minutes, ultimately managing to stay above the lower support threshold. The Crypto Fear & Greed Index has since returned to neutral levels, dropping to 51 points from 69 the previous day, after previously reaching extreme greed.
The Federal Reserve's next meeting is scheduled for October 27-28, followed by another gathering and dot-plot update on December 8-9, which will reveal whether Wednesday's rate hike was the last of the year or the beginning of more to come.