This week’s 25 basis point hike in the federal funds rate may not be surprising, but the strong likelihood that it’s the last is noteworthy for the entire crypto market, including bitcoin (BTC). Experts believe this week’s hike is good news for BTC and other crypto assets. So, why is this end of rate hikes a big deal for the crypto market?
The US witnessed a 1.1% quarter-on-quarter growth in preliminary GDP, lower than the expected 2%. This weak growth was partly due to lower inventory, along with defense and consumer spending. Despite this sluggish growth, the inflation rate increased to 4.9% in Q1, more than the estimates of 4.7% and higher than Q4’s 4.4%. This shows the resilience of the inflation rate after almost five percentage points in interest rate hikes in a year, sending mixed signals.
Interestingly, the March inflation data didn’t show a significant increase but remained steady at 4.6% on a year-on-year basis. The data moves with long and variable lags and there’s no clear indication of when long-term trends will be visible. Therefore, it is possible that the Federal Reserve chooses to pause and wait for more impact to surface. The unemployment rate’s sudden increase and tightened credit outlook further impacts the economic growth, urging the Fed to keep an eye on the trends.
If the Fed decides to pause the rate hikes at the June FOMC meeting, it would be a positive sign for bitcoin as financial conditions would ease. An extended pause after a series of hikes usually results in cuts, leading to more liquidity. Bitcoin is highly sensitive to changes in liquidity, and any increase in liquidity generally makes “risk assets” like bitcoin more attractive.
Moreover, bitcoin’s rising value influences the broader crypto market. It attracts attention to the entire ecosystem, sparking business growth and investments in market infrastructure and crypto asset services. As funds allocate more resources to bitcoin, they often seek higher return opportunities, leading to more risk-taking activities in the crypto market.
Ethereum (ETH), the special case, is directly impacted by macro yields. ETH’s relatively stable yield and its recent flexible Shapella upgrade make it an attractive investment option, especially as a window to broader ecosystem participation.
While the macroeconomic outlook remains uncertain, crypto-assets that are not tied to the traditional economy and embody emerging use cases have the potential to offer resilience and investment opportunities. As the narratives become more complex, closing the gap between crypto and macro landscapes may further emphasize the unique characteristics of crypto-assets.