Rallying stock and crypto markets prepare for Fed rate decision

After last year’s global energy crisis and high inflation, bitcoin has achieved a spectacular 67% rally in 2023 at press time, bouncing back along with the stock markets. Now traders and investors await the US central bank’s meeting on Wednesday, which will provide decisive clarity on the future of interest rates.

Broad consensus predicts that the Fed will raise interest rates at its next meeting by 25 basis points – bringing rates to 5%. But this year’s rally has been fueled in part by a forecast that the Federal Reserve will pivot and eventually start cutting interest rates later this year.

Fed Chair Jerome Powell has consistently emphasized that to tame inflation, a “higher for longer” interest rate regime is needed. The Fed is not interested in repeating the mistake of lowering interest rates early, the 70-year-old has said on several occasions, insists that the labor market still needs to cool to bring inflation down to the 2% target.

The Federal Reserve uses a traditional macroeconomic handbook to calibrate interest rates. Its aggressive rate hikes have recently been criticised by various senators and members of Congress, notably Senator Elizabeth Warren, arguing that the Fed should find alternatives to bringing down inflation that do not involve force people out of work.

Price indexes and unemployment, metrics used by the Fed to calculate inflation, indicate that it is winding down:

• The consumer price index for March was as low as 0.1%; energy prices fell significantly by more than 6% year-on-year, while necessities such as food and shelter had increased in price by 5.6%.
• The producer price index, a more favorable metric for the Fed to gauge inflation, fell 0.5% in March but is up nearly 3% over the past year.
• Meanwhile, the unemployment rate for March remained low at 3.5%.

Read more: What’s moving bitcoin’s price right now?

The Fed acknowledges that inflation appears to be slowing and peaked last year. At the same time, it will not risk encouraging higher bouts of inflation with premature interest rate cuts. It seems likely that The Fed will maintain its “higher for longer”.disappointing those expecting hints of a pivot in this meeting.

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