The U.S. Federal Reserve said Wednesday it would hold interest rates near zero, even as it edges closer to removing some of the extraordinary stimulus provided to financial markets since the coronavirus hit in March 2020.
The benchmark U.S. short-term interest rate will remain in the current range between 0% and 0.25%, according to a statement Wednesday from the Fed’s monetary-policy panel, the Federal Open Market Committee (FOMC).
The Fed also released a separate statement announcing it intends to “significantly” reduce the size of its balance sheet “in a predictable manner” after rate hikes start.
Crypto traders are monitoring the report because some analysts say bitcoin’s price could move in response to Fed decisions. Removing monetary accommodation tends to put downward pressure on the price of assets considered risky, including cryptocurrencies and stocks.
The price of bitcoin (BTC) briefly rose 2.5% after the decision was announced on Wednesday afternoon before falling back to slightly below its previous level. It was recently trading at $37,725, up 1.5% over the previous 24 hours.
“With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed said in a statement after the two-day, closed-door meeting.
The latest Fed decision comes as the central bank has been winding down its asset-purchasing program, an emergency source of market support that involved printing tens of billions of dollars a month in fresh money to buy Treasury bonds and mortgage securities.
That program is targeted for completion as soon as March, and many traders and economists expect the Fed to start raising interest rates at the FOMC’s next meeting that month. That would be the first rate increase since 2018.
While both crypto markets and stocks have swooned recently, economists say the Fed might need to tighten monetary policy now to address growing concerns about inflation.
The U.S. Consumer Price Index rose 7% in December from 12 months earlier, the highest since 1982.
While some analysts think of bitcoin as an inflation hedge, experience has shown that it sometimes trades more like a stock – rising when the Fed keeps monetary policy loose and reversing when the central bank tightens.
Some analysts even suggest the pressure from the Fed might sap bitcoin returns this year to the extent that crypto traders might be better off holding digital stablecoins pegged to the U.S. dollar.
“One of the main reasons investors might choose stablecoins over cryptos like BTC or others is the lower level of volatility,” said Scott Bauer, a former Goldman Sachs trader who’s now CEO of Prosper Trading Academy.
UPDATE (Jan. 25, 17:57 UTC): Updated BTC price movement in fifth graph.