Why It Could Be Disastrous For Crypto If The Fed Hikes Interest Rates

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The crypto and legacy markets could see a spike in volatility in a few hours. Jeremy Siegel, a professor at the Wharton School of Business, told CNBC’s “Closing Bell: Overtime” that “it will be a disaster” if the US Federal Reserve (FED) raises rates by 50 basis points on Feb. 1, 2023.

The Fed must raise interest rates by 0.25%

The professor insisted that if the FED mentioned a figure “that is not 25 basis points” at today’s meeting, the effects would be far-reaching.

Besides interest rate changes, Jeremy wants to see the FED change the wording of its statement and specifically mention that its monetary policy decisions over the past few months have worked. He adds that it would be refreshing for the Fed to assure the market that it is nearing the end of its tightening cycle.

Crypto market participants and veterans expect the U.S. central bank to slow its rate hikes in the coming months. However, the hope of traders and investors could be dashed if policymakers assess market conditions differently and see the need to keep rates high.

Economists expect the FED to raise interest rates by 25 basis points to 4.75% from 4.50% on Feb. 1, 2023. The bank began raising interest rates in January 2022. Over the months, the prevailing interest rate in the United States increased from 0.25% in January 2022 to 4.50% at the end of 2022.

Falling inflation, rising crypto and bitcoin prices

Inflation is one of many factors, including working conditions, that the FED considers when determining interest rates. The effects of the COVID-19 pandemic and the need for the government to step in and protect its citizens has caused governments to cut rates to record lows.

According to Jeremy, inflation was inevitable with “money poured indefinitely”, and it did so strongly in 2021 and 2022. Recent readings show that the Consumer Price Index (CPI), a tracking measure pressures on consumer goods prices and a proxy for gauging inflation, slowed after hitting multi-year highs.

In December, inflation fell to 6.5%, making it the sixth consecutive month of falling consumer prices. It peaked at 9.1% in June 2022 before falling back to 6.5% in December, 1% lower than in January 2022, when inflation stood at 7.5%.

Bitcoin prices briefly rallied in December 2022, bottoming out after losing more than 60% in 13 months from November 2021, in response to changing macroeconomic conditions, primarily inflation.

Bitcoin price on January 31 | Source: BTCUSDT on Binance, Tradingview

Over the past few weeks, Bitcoin prices have risen as the crypto market expects inflation to cool and the FED to ease its tightening in 2023.

For this reason, how the FED acts could shape Bitcoin’s short-term price formation. The coin fell sharply from around $24,000 on January 30, but stabilized yesterday.

Feature image from Canva, chart from TradingView.

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