Fed Raises Benchmark Interest Rate by 25 Basis Points

In a widely telegraphed and anticipated move, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve said Wednesday that it will lift the fed funds rate by a quarter-percentage point to a range of 0.25%-0.5% from the current 0%–0.25%. This is the first time since December 2018 that the central bank is lifting its benchmark rate.

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures," the Fed said in a statement. "The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity."

The central bank also announced that it will reduce its balance sheet "at a coming meeting," not specifying whether it will happen at the next meeting in May.

The widely tracked consumer price index (CPI) accelerated to a new four-decade high of 7.9% in February, with many economists predicting it still hasn't peaked yet, and on Tuesday, the U.S. Labor Department reported that the producer price index (PPI) rose 10% in February to an all-time high.

Crypto traders are closely watching the Fed's policy statement as the outlook for what could be a prolonged series of rate hikes or balance sheet reductions or both has so far this cycle proven to be a headwind for digital asset prices, particularly for the price of bitcoin (BTC).

“I'd say that the market is not going to react to the rate hike but will likely react very sharply to anything said in the statement or more likely, the press conference, that indicates a change in the quantitative easing exit schedule or the start of quantitative tightening,“ said Bob Iaccino, chief strategist at Path Trading Partners and co-portfolio manager at Stock Think Tank.

“Equity markets do not tend to suffer all that often or all that much, during rate-hike cycles, [and] since the bitcoin/Nasdaq correlation is still holding very strong, I would expect the same thing for cryptocurrencies in general,” Iaccino said.

Bitcoin (BTC) was trading below the $40,000 mark after the decision, still within range of Asia hour swings.

Wall Street analysts have varied outlooks for the scope of the just-begun tightening cycle, but the consensus is for roughly seven 25-basis point rate hikes over the next year.

As for markets, traders will likely be watching whether the Fed's comments will be “dovish” or “hawkish,” two terms used to describe an either cautious or more aggressive path ahead by the Fed. The CME FedWatch Tool shows that traders are split evenly over whether the central bank will go with a 25- or a 50-basis point increase at its meeting in May, which could bring the rate to as high as 1%.

Alongside this afternoon’s policy decision and statement, the Fed also released its quarterly economic projections and its “dot plot” showing expectations for the fed funds rate. The median expectation is now for seven 25-basis point hikes for 2022, which would bring the fund's rate up to 2.8% - that's about 100 basis points more higher than anticipated three months ago. The long-run neutral rate is seen at 2.4%. Committee members are also predicting much slower GDP growth, now seeing a 2.8% growth down from 4% in the December forecast.

Coming up is Fed Chairman Jerome Powell’s post-meeting press conference. “I'll be watching for any mention of the war in Ukraine affecting the future path of the global economy and subsequently the path of policy normalization at the Fed,” Iaccino said. “At Powell's testimony before the U.S. Senate, he was very direct in saying that they needed to fend off this rise in inflation ... I will be looking to see if that has changed at all and if it has, the market will react.”

UPDATE (Mar. 16, 18:26 UTC): Added information about GDP projections.

UPDATE (Mar. 16, 18:30 UTC): Added information about BTC price.