Will Fed actions still harm Bitcoin in 2023?

Recent rumors have suggested that the Fed’s restrictive monetary policies may last throughout 2023, thereby further harming the cryptocurrency markets and the value of Bitcoin. The US central bank’s policies may have harmed traditional financial markets, which in turn damaged crypto markets, as early as the middle of 2022.

Observations on the current macro scenario

Loretta Mester, president of the Federal Reserve Bank of Cleveland, specifically stated yesterday that the central bank will be obliged to hike rates further this year and keep them high for a considerable amount of time.

Mester believes the federal funds rate will rise above 5% because it may be difficult to keep inflation below 2%.

Mester really continues to assume at least a 50 basis point increase, or two from the current 25 basis point real Federal Funds rate of 4.65%.

Whilst they have recently been changing their opinions on this matter quite frequently and very quickly, markets currently believe that a single 25-point hike is more plausible.

Fed activity not related to Bitcoin

It is sufficient to consider that, up until Monday, there was speculation that the Fed may decide against raising rates in May, whereas following Mester’s remarks, the most likely assumption is back to a 25-point hike.

It’s also odd that, despite Mester’s assertions to the contrary, the financial markets have indicated that a following 25 basis point drop in interest rates in June is possible.

Mester is not the actual chairman of the Fed; he is merely the president of the Cleveland Fed. Nonetheless, the FOMC has recently made decisions regarding rate rises frequently by consensus, thus Mester’s statements at this moment hold a lot of weight.

Additionally, according to financial markets, interest rates could be further reduced in 2023, possibly to a level just below the current level.

As a result, it appears that the Fed is moving in one direction while markets are anticipating a change.

Fed’s decisions and their effects on markets in general and Bitcoin in particular

The issue is that markets typically react poorly, sometimes quite poorly, when reality proves to be more unfavorable than anticipated.

It is possible that the current palpable optimism rests more on wishful thinking than on a sober assessment of what is actually taking place.

Mester’s short-term claims may be plausible, suggesting that the markets haven’t considered what may happen beyond May. Next week’s US March inflation rate will matter.

The markets’ response can be unfavorable if it turns out to be worse than expected. A very unfavorable response does not appear to be particularly plausible at this time because Mester herself used a reference rate of 5%, which is not significantly higher than the real interest rate at the moment.

The effects on Bitcoin and cryptocurrencies

In 2022, the Fed’s actions had a significant impact on Bitcoin and the financial markets, which caused them to decline significantly. It is important to note that this dynamic finally appeared in the crypto markets as well.

Certain cryptocurrencies, like Bitcoin, are now regarded hazardous assets that may be compared to other investments with comparable financial characteristics that have been in the financial markets for a while.

So, anything that impacts hazardous assets on conventional exchanges eventually affects cryptocurrency prices, particularly Bitcoin.

If financial markets respond unfavorably to next week’s inflation statistics or the Fed’s May rate hike, Bitcoin and cryptocurrency markets will certainly follow.

If the following week’s reading is small and the rate hike in May is 25 points, the markets may not react negatively.

The issue with inflation

It’s important to note that inflation dropped from 6.4% in January to 6% in February, but from 6.5% in December to 6.4% in January. Nonetheless, compared to the 7.1% in November, it had drastically decreased by December.

At this point, with interest rates at their highest position in decades, one may anticipate a further sizable decline in American inflation in March, as occurred, for instance, in the Eurozone. After all, the inflation rate in the Eurozone “collapsed” to 6.9% in March from 8.5% in February.

Hence, Loretta Mester’s statements suggest both a large and controlled drop in US inflation in March. The latter may underperform markets.

Mester said that the Fed’s current monetary policy depends on how low inflation and inflation expectations are.

Jerome Powell, the governor of the central bank, has always said that their judgments at this moment depend on the data, so everything will depend on how things develop, particularly from a monetary standpoint.