The spotlight is on the US Federal Reserve leading up to its interest rate decision this Wednesday. In their battle against rocketing inflation rates, the Fed has been raising interest rates since March 2022. U.S. inflation topped out at 9.1% in June 2022 (reported in July 2022) and has steadily declined since. This led to February’s CPI (reported last week) coming in at 6%, precisely what was forecasted. It is worth noting that this figure is still a long way from the Fed’s desired target of 2%. Analysts expect a 25bps rate hike today by the Fed, which would see interest rates hit 4.75-5%. Since the banking issues began at the start of March, analysts have flip-flopped between expecting no hike and a 25 bps hike, something we reported on previously. But now, most estimate a 25bps hike with an 86.4% probability for this outcome. The remainder suggests no change, with a 0% chance of a rate cut.
Federal Reserve interest rate probabilities leading up to the event. Source: CMEGroup
How Will Bitcoin React?
With the consensus being 25bps, the market will likely absorb the information quickly if the Fed announces it. There will be less shock or uncertainty, which markets do not like. It may be the catalyst for Bitcoin to finally break the $28,500 and provide the pathway to $30,000 as it is the expected figure, but will it be that simple? The underlying issue with the impending rate hike is a pause/no change for March or a meagre chance of a cut that, in theory, would provide the ideal conditions for Bitcoin to continue its 2023 rally. Therefore, three out of the four possible cases would result in a Bitcoin pump, assuming the expected 25bps also leads to the upside. On the other hand, if we look at it outside the majority case, the 25bps hike is so largely baked-in that Bitcoin may sell off due to the lack of a positive market shock that a no-change decision would bring. After all, the Fed increasing rates, during a time when banking uncertainty is a hot topic, would solidify that they’re set on finishing off the job in bringing inflation down to 2% and reaching the Fed terminal rate. A no-change or rate cut would be such a shock to the market, in a positive way due to the probability counted for, that it could see Bitcoin rally towards the next level of resistance at ~$32,000. In this case, we may see another 10% daily candle to the upside and open the runway towards $40,000. The final possibilities are a 50bps hike or a rate cut. Both of these outcomes would jolt bitcoin. A 50bps hike would likely result in a significant red day for Bitcoin and the stock market, whereas a rate reduction could see the market rally. Both of these outcomes have a 0% chance of happening. These are at the two extreme ends of the scale and, therefore, are seen as the most unlikely outcomes. There is another possibility, though, as Bitcoin has been doing its own thing for most of the year, has been unaffected by traditional markets, and is following its own path, albeit highly similar to Gold. Given the current sentiment with banking uncertainty, bitcoin remains on its course regardless of the rate hike. This theory is slightly more left field as it places an enormous significance on bitcoin’s fundamentals, but it is certainly possible when banks collapse. It is important to state this is not financial advice. It is purely a theoretical scenario that may play out and should not be taken as guaranteed.
