In the published minutes of the last meeting of the US Federal Reserve, it was pointed out that if inflation continues to remain above the target, the interest rate increase may be on the agenda again. This signal changed the direction of expectations, especially in risky assets and cryptocurrency markets. While the expectation of interest rate cuts and monetary expansion has been dominant in the market recently, the situation has been reversed with this warning of the FED.
“Hawk” Tone Predominated at the Meeting
At the FED’s January meeting, the interest rate was kept constant between 3.5 and 3.75 percent. However, in the minutes, it was revealed that some members argued that they should be cautious about reducing interest rates and were in favor of considering raising interest rates if necessary. Managers suggested that easing steps could be taken only if there was a significant and permanent decrease in inflation.
Effects on the Cryptocurrency Market
There has been an optimistic atmosphere in the markets lately that interest rate cuts will continue and financing conditions will be relaxed. However, the FED’s latest messages have raised concerns that liquidity conditions may tighten, especially in the cryptocurrency market. While high interest rates and shrinking liquidity prevented rallies in crypto assets, they also highlighted a cautious approach in investor behavior.
At the session where the interest rate decision was announced, it was decided by a majority of 10 to 2 to keep the interest rates constant. Despite this, the minutes emphasized that an interest rate increase is by no means off the table. In particular, uncertainty about the course of inflation caused the pressure on Bitcoin and the cryptocurrency market to continue.
While FED managers left the door open to the possibility of “upward adjustment”, they signaled that the relief in the market might be temporary. In particular, the inflation data to be announced in February will play a decisive role in the next interest rate steps.
This change in direction in interest policy may even cause investment inflows into cryptocurrency funds to slow down. It is estimated that the revival experienced in crypto with previous interest rate cuts will pause in the face of the possibility of a new interest rate increase.
Looking at the futures contracts traded on the Chicago Mercantile Exchange, there is a high probability that the interest rate will be maintained in March. On the other hand, a possible interest rate increase scenario is no longer completely ignored.
According to the evaluations in the FED meeting minutes, the direction of the market will mainly be determined by the upcoming inflation data. If the data to be announced exceeds expectations, an interest rate increase may be on the agenda again. In the opposite case, it stands out that the pressure on the markets may be temporary.
