- The Federal Reserve is likely to increase interest rates once again before the end of 2023
- Currently, the benchmark interest rate stands at 5.5%
- Continued interest rate hikes aimed at curbing inflation will hurt the Bitcoin (BTC) price
YEREVAN (CoinChapter.com) — Will the Federal Reserve benchmark interest rates reach 7%?
The scenario is unlikely anytime soon, but experts already warn of disastrous consequences should that happen. Not only will it impact the financial markets in general, but it may also affect other investments, such as Bitcoin (BTC) and other cryptocurrencies.
In a recent interview with the Times of India, JP Morgan Chase & Co. CEO Jamie Dimon expressed concerns about the potential consequences of the Fed’s benchmark interest rates reaching 7%.
Dimon, who was visiting Mumbai for a JPMorgan investor summit, cautioned that the world might not be adequately prepared for such a worst-case scenario.
“If they are going to have lower volumes and higher rates, there will be stress in the system. Warren Buffett says you find out who is swimming naked when the tide goes out. That will be the tide going out,”
he said, according to Bloomberg quoting the Times of India.
More Rate Hikes Ahead from the Fed
There is a consensus among economists that the Federal Reserve is nearing the end of its tightening. A series of rate hikes has seen the benchmark rate increase to 5.5%. However, the JP Morgan Chase executive suggested that further rate increases may be necessary to combat inflation.
Dimon further emphasized that the impact of a move from 5% to 7% would be more detrimental to the US economy than the transition from 3% to 5%. The fact that there is a looming threat of stagflation does not help.
“Going from zero to 2% was almost no increase. Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility. I am not sure if the world is prepared for 7%,”
If the Fed were to raise rates to 7%, it would have significant implications for American businesses and consumers. Already, economists are predicting a 60% probability of a US recession within the next 12 months. Some experts are anticipating a downturn as early as this year.
Meanwhile, Jamie Dimon is not the only one seeing more rate hikes ahead. Neel Kashkari, President of the Minneapolis Federal Reserve Bank, also believes the Fed will continue raising interest rates.
According to him, because of the unexpectedly robust performance of the US economy, the Fed must maintain the elevated levels for an extended period to effectively lower inflation to the target rate of 2%.
The impact of Fed interest rate hikes on Bitcoin (BTC)
The Federal Reserve’s decisions ripple effect on various investments, including Bitcoin (BTC) and the larger cryptocurrency market. When the Fed raises interest rates, it strengthens the value of the US dollar. This causes a decline in crypto assets priced in dollars.
When interest rates are low, people have extra liquidity to take risks by opting for volatile assets like crypto.
“Should Fed Funds continue to move higher, we’ll likely see continued strength in the dollar – and this should be a headwind to crypto prices, given the strong inverse correlation observed between the dollar and bitcoin. At the end of the day, if investors can get 7% risk free, there’s much less incentive for capital to flow into more volatile risk assets such as crypto,”
Ryan Grace, Head of tastycrypto told CoinChapter.
Meanwhile, movements in the stock market also impact the Bitcoin price. When the Fed raises interest rates, businesses’ profitability and growth potential decline, leading to stock price drops. Some investors may sell their cryptocurrency holdings to mitigate risks or offset losses.
Conversely, when the Fed lowers interest rates, stock prices rise, potentially benefiting the cryptocurrency market as investors seek to diversify or seize opportunities.
Bitcoin (BTC) currently trades at a little over $26,200, according to TradingView charts. That is over 60% below the all-time high of $68,789 in November 2021.
However, if the Federal Reserve pushes interest rates up to 7%, the BTC price will tank further. As a result, altcoins will also face severe rate cuts in their price.
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