Banking Turmoil Fears Heighten as FED Hikes Interest Rate by 0.25%

Financial markets have seen volatility following Wednesday’s FOMC meeting. But the biggest threat is ahead – and cryptos won’t be spared.

Tipping Point

The federal funds rate currently sits at 5%-5.25%. This range resulted from the Fed’s decision to increase the interest rate by 25 basis points during the Federal Open Markets Committee (FOMC) on May 3.

Prior to the announcement, the markets had widely anticipated that the Federal Open Market Committee (FOMC) – the Fed’s governing body responsible for setting monetary policy – would approve a 0.25 percentage point increase in interest rates, marking the 10th rate hike since March 2022 and bringing the US operating interest rate to 5-5.25%.

While the rate hike was expected, the Fed omitted language that had previously signaled more hikes in the future, indicating a potential pause in rate increases. However, a break is far from cutting the rate, given that inflation data remains above 2%.

Inflation persists at high levels, with the consumer price index displaying a 5% increase for the 12 months ending in March, albeit slightly lower than February’s 6%. The Federal Reserve aims to bring inflation back to its 2% target rate, the fed funds target rate.

A Dicey Move

The Fed’s move comes amid mounting fears over banking contagion in recent months. In March, Silicon Valley Bank’s bank run sent shockwaves to the financial markets. SVB was closely associated with Silicon fintech startups, which sustained the losses from interest rate hikes.

Following SVB, the crypto-friendly bank Silvergate announced its closure, with US regulators quickly coming to the rescue. Despite multiple efforts to ensure the well-handling of the banking system, the banking crisis has withstood the test of time. By the end of March, First Republic Bank became the third major bank to fall.

And today, PacWest Bankcorp $PACW crashed over 55% in after-hours trading. Speculations regarding a potential collapse are rife after Bloomberg reported the bank was looking for sale. Experts warn that the banking system likely faces extreme turbulence in the coming time under rate hike pressure.

Federal Reserve Chair Jerome Powell stated that the Fed would be ‘ready to do more’ if economic activity warrants it. They will examine incoming data on a meeting-by-meeting basis to determine future policy actions.

The Fed chairman also noted that ‘the banking system is sound and resilient. Powell pointed out that a soft landing for the economy is likely, meaning a drop in inflation without a recession or economic crisis.

Market Fluctuates

The crypto market was volatile shortly after the Fed’s news, with Bitcoin and altcoins dropping slightly. But bullish momentum has returned, as Bitcoin trading volume increased to $19 billion, and the market capitalization remained stable at $562 billion, according to CoinMarketCap today.

However, there were notable fluctuations in the market prices of other virtual currencies, with several cryptocurrencies dropping simultaneously. In the past 24 hours, Render Token saw the highest increase of 11.12%, while Sui experienced the highest discount, down 67.80% in the last 24 hours.

Although the crypto market is expected to have little response to the rate hike, Bitcoin has outperformed the stock market on seven of the previous ten Fed days, according to Callie Cox, a US investment analyst at eToro.

Greg Magadini, director of derivatives at crypto analytics firm Amberdata, believes that macroeconomic events are driving Bitcoin’s performance this year, and the bullish guidance from the Fed on a pause in rate hikes could push BTC to slightly higher levels, around 29k-30k.

The future reaction of the crypto market to macroeconomic events and regulatory changes is an open question as the industry continues to progress and transform.

For investors, uncertainty remains about whether the US central bank has reached the end of its rate hike cycle or will continue tightening to manage inflation.