Markets Trade Lower After 0.25% Rate Hike

The US Federal Reserve has hiked its benchmark interest rate by 25 basis points in a widely expected decision.

Markets turned lower after Fed chair Jerome Powell said that central bank officials “don’t see rate cuts this year,” in a press conference following the release.

Bitcoin, which hit a nine-month high in March, is down over 4% in the past hour, while Ether, the second-largest digital asset, is down 3%.

Most major tokens are down, with Ripple (XRP), Cosmos (ATOM) and GMX down over 5%.

The overall value of the crypto market has dropped by 3% to $1.19T in the past 24 hours, according to CoinGecko.

The broader equity markets appear to have taken the Fed’s move in their stride — the S&P 500 rallied initially but is now trading flat on the day.

Bank Failures

This Fed decision was one of the most anticipated in recent memory. Two of the three largest bank failures in US history took place in March 2023.

The banks’ bond portfolios witnessed a significant decline, which played a key role in their failures. These losses came about as a result of the Federal Reserve’s aggressive rate hikes, which started in March 2022 and have continued at each of the eight following meetings, including the most recent one today.

Despite the Fed’s efforts, however, inflation is still running hot in the United States. The latest Consumer Price Index for February placed year-over-year inflation at 6%.

The Fed acknowledges this. “Inflation remains elevated,” it said in the press release announcing the decision.

BTC Open Interest at ATH

While prices are down, open interest on Bitcoin, which is the total value of options for an asset, is up in a big way — Deribit, the leading options platform accounting for 90% of BTC open interest, shows a major spike to over 400,000 contracts betting on the price of the world’s most valuable digital asset. That’s a record for the platform, according to its data dashboard.

In a conversation with The Defiant, Luuk Strijers, the chief commercial officer of Deribit, pinned the surge in interest in options primarily on a potential banking crisis.

“This time, the core value of Bitcoin is showcasing what it’s meant to do, and that’s this peak,” he said.

Around 90% of Deribit’s customers are institutional traders, Strijers said, which suggests that the recent surge hasn’t been driven by retail trading.

Bank Term Funding Program

To shore up the banking system, the central bank has also introduced a new lending facility called the Bank Term Funding Program (BTFP). The program allows banks and other financial institutions to borrow against bonds like U.S. Treasuries at face value.

The idea is that BTFP will allow banks to monetize their now-devalued securities without having to sell them, making the institutions more able to meet depositors’ withdrawals.

The jury is out on whether the program is simply quantitative easing by another name, or whether it won’t have the inflationary impact that quantitative easing is generally accepted to have.

Going into the meeting, the Chicago Mercantile Exchange’s FedWatch tool placed the probability of a 25 basis point hike at 86.4%.

Looking forward to the Fed’s next meeting in May, investors expect a 50% chance of another 25 basis point hike.

May Target Rate Probabilities