Bitcoin Sinks Below $27K as Fed, Powell Keep Focus on Inflation

Bitcoin sank below $27,000 as the U.S. Federal Open Market Committee (FOMC) did as was widely expected Wednesday, raising the interest rate by a quarter point.

The decision reinforced the central bank's concerns that inflation remained problematic. The FOMC is "strongly committed to returning inflation to our 2% objective," Fed Chair Jerome Powell said following the announcement.

Yet in a statement accompanying the rate hike Wednesday afternoon, the FOMC also acknowledged this month's near banking meltdown, saying "recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation."

The largest cryptocurrency was recently trading at about $27,030, down 4.1% over the past 24 hours with the BTC/USD trading pair plunging as low as $26,815 on the Coinbase exchange at one point. Earlier Wednesday, BTC had changed hands as high as $28,815, reaching its highest level since June 10 as some investors seemed hopeful for a potential cessation of the Fed's year-long diet of hawkish interest rate increases. The Fed dashed those hopes.

Still, a number of analysts were optimistic about bitcoin's price in the near future, given the bank sector's calamities. "Bitcoin, straddling between being the leading risk-on asset and a financial lifeboat in the event of an all-out banking crisis, has benefitted from the recent turmoil and now the prospect that the Fed’s tightening could be over," James Lavish, managing partner at Bitcoin Opportunity Fund, told CoinDesk in an email.

However, Lavish said he would still expect volatility ahead given the recent banking crisis continues. "We march toward a recession, or worse, a much larger credit event occurs," he said.

Samir Kerbage, chief investment officer at crypto asset manager Hashdex, told CoinDesk via email that “while this rate hike is a negative for risk assets in general, it is positive for bitcoin and gold as this puts more stress on the banking sector."

Vineeth Bhuvanagiri, the managing director of EMURGO Fintech, the founding entity of the Cardano blockchain, also noted in an email to CoinDesk in an email that “banks are really struggling," adding that "Authorities are having to return to massive liquidity injections to shore up the financial sector. And bank runs are forcing investors to rethink what it is to actually own assets – that is, they’re realizing that deposits in banks can feature major counterparty risk.

Ether (ETH), the second-largest cryptocurrency by market value, was recently hovering around the $1,740 level, down 3.1% from Tuesday, same time. Among other major digital currencies, crypto payment platform Ripple’s native XRP token was recently down 11%, a reversal from earlier in the day when XRP jumped 20% after reports Tuesday that Ripple was well-placed to win a landmark case with the U.S. Securities and Exchange.

The CoinDesk Market Index, which measures overall crypto market performance, was recently up 4%.

Traditional markets fell into the red, albeit not by much following the Fed annoucement with the S&P 500, Dow Jones Industrial Average (DJIA) and tech-heavy Nasdaq all closing down 1.6%.

The 2-year Treasury rate, a gauge that usually reflects near-term interest rate expectations, fell to 3.93%.

The U.S. central bank’s decision comes after the February Consumer Price Index showed month-over-month inflation dropping to 6% from the previous month's 6.4% reading, and the core annual rate, which strips away volatile energy and food costs, ticked down slightly. The declining CPI suggested that Fed measures were at least slowly taming inflation and offered support for monetary policy observers who have insisted in recent months that the Fed had overstepped.

Meanwhile, the labor market has remained strong with a drop in the most recent weekly U.S. jobless aid claims.

“I think Powell's gonna be very sensitive about surprising the market,” Ben McMillan, chief investment officer of crypto asset manager IDX Digital Assets, told CoinDesk prior to the decision.

But McMillan maintained that he had seen a more bullish attitude toward risk assets.

"We've noticed that people are starting to think of bitcoin as the same bucket now as commodities or hard assets as stores of value,” he said.

In an email to CoinDesk, Brent Xu, chief executive officer and co-founder of Umee, a Web3 bond-market platform, wrote that bitcoin had "shown remarkable strength during this global crisis involving the banks."

"Something resembling a mini bull run could be in play, but I think there’s a need to be cautious here," he wrote. "The Federal Reserve might continue hiking rates higher than expected – that is, beyond this most recent 25 basis-point hike –  given that inflation has yet to be tamed. A pullback could be in store because of this, meaning that it’s just too uncertain a time right now for more definitive calls to be made."

James Rubin contributed to this report.

UPDATE (March 22, 2023, 20:28 UTC): Updates with latest XRP and CoinDesk Market Index figures.