Fed remains hawkish with 25 bps hike, how will Bitcoin price react?

• The US Federal Reserve raised interest rates by 25 bps, in line with market expectations.
• Crypto traders are focused on Fed Chair Jerome Powell’s statement to determine whether the central bank will continue to raise interest rates. 
• Bitcoin price rally could see a temporary pullback if Powell’s retains a hawkish stance and tightens financial conditions in the US economy further.

Bitcoin price plunged to its weekly low of $22,862 earlier today, as traders awaited the US Federal Reserve’s rate hike decision. BTC has traded sideways in the 24-hours preceding the rate hike announcement. Bitcoin price held steady above the $23,000 immediately after the 25 bps hike.

The US Federal Reserve raised interest rates by 425 basis points (bps) over 2022. There were seven rate hikes in 2022. Four of the seven hikes were in 75 basis-point hikes, two were 50 basis-point hikes and one was a 25 basis-point hike. Expectations for this February meeting were firmly centered on the Fed’s 25 basis point hike, slowing the pace of monetary policy tightening. 

A 25 bps hike was already priced in and the focus has shifted to Fed chair Jerome Powell’s acknowledgement of recent softening in inflation and economic activity. 

Bitcoin price rallied 40% in January 2023 while most altcoins nearly doubled their market capitalization, riding the bullish wave. The Federal Open Market Committee (FOMC) seeks to achieve maximum employment and inflation at the rate of 2% in the long run. To support this, the target range for the federal funds rate has been increase to 4.50 to 4.75%. The FOMC anticipates that ongoing increases in the target range would be appropriate in order to attain a stance of monetary policy that restricts inflation to 2%. 

Also read: Will the Fed Interest Rate Decision spell disaster for Bitcoin price?

Bitcoin and altcoin traders brace for volatility with Fed’s rate hike announcement

Bitcoin’s 40% price rally is faced with the biggest test yet in the shape of the US Federal Reserve’s policy decision. After cryptocurrencies and US equities witnessed massive price rallies since the beginning of 2023, market participants are bracing for impact. 

The Fed’s stance could remain hawkish with no policy pivot in sight soon, market participants are awaiting Fed Chair Jerome Powell’s statement for an affirmation of the same. The US Federal Reserve has two major mandates – taming the unemployment rate and controlling inflation. 

Based on the numbers for the two mandates, the Fed decides its stance. The US Central Bank is currently on a tightening path and focused on increasing interest rates to keep inflation in check. 

As seen in CME’s FedWatch Tool, there was a 99.4% probability for a 25 basis point hike, leaving 0.6% for a 50 basis point hike. The Fed’s interest rate decision came at market expectations. 

What to expect from Bitcoin price 

With the 25 bps rate hike on February 1, crypto market participants are cautious and there is no knee-jerk reaction by traders. If Powell’s stance is hawkish it could increase the selling pressure on Bitcoin and cryptocurrencies. 

It is expected that cryptocurrency prices will witness a spike in volatility within the hours following the Fed’s announcement. 

Bitcoin price recovered from the FTX-induced crash in November 2022 and wiped out all losses. The changing macroeconomic conditions, mainly inflation influenced the asset’s recovery. 

For this reason, Fed Chair Jerome Powell’s stance could shape the short-term price formation for Bitcoin. BTC price sharply recoiled from the $24,000 level on January 30 and the $23,000 level remains critical to Bitcoin’s uptrend. 

All eyes on Jerome Powell’s speech

Yohay Elam, Senior Analyst at FXStreet, expected a continuation of Fed’s hawkish outlook. Elam wrote on his preview,

If Jerome Powell conveys a hawkish message as I expect, the US Dollar will rise, benefiting from prospects of higher rates – and from safe-haven flows. If the United States continues to cool down its economy, it will affect the entire world, causing a downturn. In times of worry, the Greenback is the currency of choice.

The Federal Reserve’s 25bps rate hike and continued hawkish stance could strengthen the US Dollar and negatively influence equities and risk assets, putting an end to the massive price rallies of January 2023.