Recent analyses indicate that the cryptocurrency markets have often responded unpredictably to decisions made by the Federal Reserve regarding interest rates.
In a post from March 20, a contributor observed that while certain Fed announcements lead to market rallies, others result in sudden downturns, even when the policy outcomes are similar. This trend has been evident since the Fed significantly increased interest rates in 2022 in an effort to control rampant inflation. The central bank raised rates from near zero in March to 4.50% by December, as inflation soared to a 40-year high of 9.1%.
This shift rattled financial markets, resulting in significant declines for both stocks and cryptocurrencies. By the end of 2022, Bitcoin had dropped below $16,000 after reaching its all-time high of $69,000 in late 2021. Liquidity tightened, and borrowing costs rose, adversely affecting risk assets across the board.
Since then, the cryptocurrency market has remained highly sensitive to Fed policies. Bitcoin surged past $72,000 in March 2024 when rates were kept steady, but it experienced a sharp decline the following month. A similar pause in May triggered a rapid recovery, yet a July decision led to a 20% plunge in Bitcoin before it eventually stabilized.
When the Fed first reduced interest rates last September, it sparked a considerable rally. A pro-crypto electoral outcome in November, combined with another rate cut, propelled Bitcoin to new all-time highs. However, momentum waned when the Fed opted to keep rates unchanged in December, resulting in a market correction.
The latest meeting of the Federal Open Market Committee on March 19 confirmed that rates would remain at 4.25%–4.50%, as anticipated. Discussions on social media regarding this decision appeared to be less intense than during previous meetings, indicating that traders might have already factored it into their strategies.
Nonetheless, the market responded favorably. Bitcoin (BTC) increased by 4.5% to $85,786, briefly reaching $87,431, while Ethereum (ETH) and Solana (SOL) experienced gains of 4% and 6%, respectively. The total market capitalization for cryptocurrencies rose by 2% to $2.91 trillion, with futures markets facing $355 million in liquidations, primarily from short positions.
Fed chair Jerome Powell has indicated that two rate cuts are anticipated this year. However, concerns about inflation and sluggish economic growth persist. Given that past responses can be deceptive, it remains uncertain whether the market can sustain its recent upward trajectory.