More Fed Action May Come

A big rally has dominated the crypto market following the recent US CPI report. Inflation eases slightly again, but does this mean the Fed will decrease interest rates?

The Bureau of Labor Statistics reported Monday that the Consumer Price Index (CPI), an annual inflation rate, reached 6% in February, the lowest rate since September 2021.

The CP index measures inflation, tracking the average price change of goods and services over time. Inflation in February was lower than in January. In January, CPI data recorded a 6.4% increase annually, driven by shelter costs.

The data for both months matched economists’ predictions. In response to the news, Bitcoin, the largest cryptocurrency by market capitalization, has an outstanding performance.

TradingView said Bitcoin’s price surpassed $26,000 shortly after the CPI data’s release. The flagship crypto had nearly broken the $27,000 mark before falling to around $24,000 in later trade.

Market May Be Overshooting Reality

Positive market sentiment has led to a ripple effect across other altcoins. Ethereum has rallied by 4.3% over the last 24 hours and currently testing the $1,800 resilience level. The top 10 tokens have been up from 1% to 6%.

Fed Chairman Jerome Powell repeatedly warned that the central bank would take more aggressive action to curb inflation. This sparked rumors that the Fed could increase rates by 50 basis points in the coming week.

However, recent turmoil in the banking sector has led to speculation that the central bank may indicate a pause in its interest rate hikes.

Following the liquidity crisis of Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank closed their doors. Regulatory intervention came onto the scene to prevent potential systemic risks.

Under the SVB contagion, stablecoins have been heavily affected. Circle, the issuer of stablecoin USDC, confirmed $3.3 billion stuck in Silicon Valley Bank. This revelation made the value of USDC de-peg below $1.

Stablecoins Look Iffy

Other stablecoin projects were also under attack. MakerDAO’s stablecoin DAI and Binance USD BUSD were also de-pegged. Investors panicked and sold their stablecoins, causing their value to drop.

Many have speculated that regulators’ action toward Signature Bank is motivated by a desire to undermine the cryptocurrency industry. These banks were well-known for supporting cryptocurrency, providing critical on-ramp and off-ramp services for many industry firms.

Signature Bank was initially known for real estate lending. The bank started shifting its focus to the crypto sector in recent years.

According to the record, 27% of Signature Bank’s deposits came from digital assets in early 2022. The market became volatile after the FTX exchange crash, causing billions of withdrawals from the bank.

The US Treasury Department approved plans to dissolve both Signature Bank and Silicon Valley Bank to protect depositors and prevent systemic risks.

The US Federal Reserve (Fed) also established the Bank Term Funding Program (BTFP) to help cover financial institutions from market turmoil caused by the SVB collapse.

The US Treasury Department has set aside up to $25 billion to cover any losses for the BTFP program. Regulators stated that depositors at Silicon Valley Bank could access all their funds starting Monday, March 13th.

Big Banks Buying Assets

Meanwhile, HSBC Holdings reportedly acquired the UK operations of Silicon Valley Bank in a £1 deal. As stated by HSBC Group CEO Noel Quinn, all deposits are secured upon the agreement.

As a result of these recent developments, there is concern that the crypto space will be left with a significant gap in terms of financial services infrastructure.

The failures of Silicon Valley Bank and Signature Bank over the past few days undoubtedly will lead to a more cautious approach to monetary policy, potentially tightening up crypto regulations.

Inflation is lower, but it doesn’t signal lower interest rates. Experts believe an interest rate hike at the FOMC meeting on March 22 is coming, and this may wake markets up to reality.