The Federal Reserve raised interest rates by 50 basis points, and Bitcoin rose alongside US stocks

Author: Jasmine, Hive Tech

In the early hours of today Beijing time, the U.S. Federal Reserve announced its May decision, raising the target range for the federal funds rate by 50 basis points to 0.75% to 1%. This is the largest rate hike by the Fed in 22 years.

Following the Fed's decision, U.S. stocks briefly rose, with the Dow Jones increasing by 2.81%, the Nasdaq by 3.19%, and the S&P 500 by 2.99%. In addition to the collective gains of the three major U.S. stock indices, technology and banking stocks also rose, while Bitcoin, the leading asset in the cryptocurrency space, saw a 5% increase within 24 hours, briefly surpassing $40,000, maintaining its correlation with U.S. stocks at the time of the policy announcement.

The actual rate hike in the Fed's May decision did not exceed expectations, especially after its chairman, Jerome Powell, ruled out the possibility of a 75 basis point increase. Analysts believe that the financial asset market has already digested the panic caused by the Fed's rate hike, and a less aggressive tightening policy will benefit the rebound of risk asset markets.

Rate hike did not exceed expectations, Fed to officially begin balance sheet reduction next month

As predicted by CME's "FedWatch," the Fed's May decision raised the federal funds rate by 50 basis points to a level of 0.75% to 1%.

The federal funds rate is the overnight loan rate between banks. In March 2020, affected by the COVID-19 pandemic, the Fed lowered the federal funds rate to zero to stimulate the market and cushion the economic impact of the pandemic. The zero federal funds rate was maintained for two years. Until March of this year, the Fed began this round of rate hikes, with the first increase of 25 basis points. The 50 basis point increase in May is also the first time since 2000 that the Fed has raised rates by 0.5% in a single meeting.

Previously, there were concerns that the Fed might "raise rates by 75 basis points." Now, this concern has been dispelled by Fed Chairman Jerome Powell. In the press conference following the decision, he stated that the committee is not currently considering a 75 basis point increase and should discuss a 50 basis point increase in the upcoming meetings.

Powell ruled out the possibility of a 75 basis point increase

Rate hikes are the Fed's means of curbing and reducing inflation, which is currently the main goal for the U.S. The Fed's statement indicated that overall economic activity in the U.S. declined in the first quarter, but household spending and business fixed investment remained strong. In recent months, U.S. employment has shown strong growth, and the unemployment rate has significantly decreased. However, the inflation rate remains high, reflecting a supply-demand imbalance related to the COVID-19 pandemic, rising energy prices, and broader price pressures. Additionally, events such as the Russia-Ukraine conflict are adding extra upward pressure on inflation.

"Inflation is too high, and we understand the difficulties it causes," Powell also stated at the press conference, "We are taking swift action to restore it."

According to the Fed's statement, it will place a high emphasis on inflation risks, seeking to achieve full employment and a long-term inflation rate of 2% through appropriate tightening of monetary policy. It is expected that the inflation rate will fall back to 2%, while the labor market will remain strong.

In addition to the implementation of the May rate hike, the Fed also released a plan for "reducing the size of the Fed's balance sheet." The plan states that starting June 1, the Fed will "shrink" its balance sheet at a pace of $47.5 billion per month, which will be maintained for three months, and after the first three months of "shrinkage," the cap will gradually increase to $95 billion per month, which includes a monthly reduction of $60 billion in U.S. Treasuries, $35 billion in agency bonds, and agency mortgage-backed securities.

Aggressive rate hikes ruled out, Bitcoin and U.S. stocks both rise

After the Fed raised rates by 0.5%, Bitcoin saw a 5% increase within 24 hours, maintaining around $39,700 before publication.

According to Coingecko data, Bitcoin began to climb before the Fed meeting concluded, especially after Powell ruled out the possibility of a 75 basis point increase. During his speech, Bitcoin broke through $40,000, and the entire cryptocurrency market also rose, with the overall market capitalization increasing by 5.4% to $1.89 trillion.

Bitcoin surged after the Fed's May rate hike announcement

Nick Mancini, research director at the crypto sentiment analysis platform Trade The Chain, believes that the market has digested expectations for continued rate hikes of 0.25% to 0.50% in 2022, providing certainty to the market and thus fostering a bullish price trend. "Any guidance from the Fed's FOMC that does not include a 75 basis point hike will be favorable for crypto assets and stocks."

Indeed, this round of Bitcoin's rebound coincides with a broader stock market rebound. Following the Fed's decision, the Dow Jones increased by 2.81%, the Nasdaq by 3.19%, and the S&P 500 by 2.99%. Major tech stocks in the U.S. also collectively rose, with Apple up 4.1%, Amazon up 1.35%, and Google up 4.2%; U.S. bank stocks also soared, with JPMorgan up 3.29%, Goldman Sachs up 2.9%, and Morgan Stanley up 4.13%.

The correlation between Bitcoin and U.S. stocks has shown a relationship under the influence of policy. In fact, in the first quarter of 2022, the correlation coefficient between the S&P 500 and Bitcoin reached as high as 0.96. A report from the OKLink Research Institute in the first quarter indicated that since early 2020, the volatility of Bitcoin has shown a positive correlation with the S&P 500 index, and the correlation coefficient has been increasing, especially since the bull market began in 2021, this correlation has become more pronounced.

Jiang Zhaosheng, a senior researcher at the OKLink Research Institute, previously told Hive Tech, "This strong correlation reveals two key pieces of information: first, Bitcoin is no longer a safe-haven asset but a risk asset; second, the correlation between Bitcoin and other crypto assets with the stock market further amplifies the interaction between risks in traditional financial markets and the cryptocurrency market."

Joy Alseini, research director at Eaglebrook Advisors, stated in an interview with CNBC that due to inflation rates being at a 40-year high, the market expects the most aggressive tightening plans to emerge in the same timeframe. "If the Fed does not become as hawkish as people fear, these expectations will lead to a 'not so bad' rebound," he specifically mentioned Powell's statement of "ruling out the possibility of a 75 basis point increase," adding, "This opened the door to the rally we are seeing today."

Alseini believes that if there are signs that inflation is peaking, the Fed will continue to show patience. "Less aggressive tightening policies will benefit Bitcoin, Ethereum, and digital assets, which will continue to rebound more strongly than traditional stocks."

Currently, the Bitcoin Fear and Greed Index has fallen into the "extreme fear" zone, indicating that crypto traders have a low risk appetite. This index has shifted from "extreme greed" sentiment in November last year to the "fear" zone in recent months. After the market digested the Fed's rate hike expectations, traders' sentiments are changing.