As U.S inflation dropped to 7.1% in November, the Federal Reserve announced that it will continue increasing interest rates on borrowed funds until it can bring inflation down to the targeted 2%. Crypto and stock markets fell after the Fed revealed it will be hiking rates in 2023.
On Tuesday, the U.S Bureau of Labour Statistics (BLS) released its consumer price index (CPI) for the month of November which showed a 0.1% increase in the price of items including fuel, food and power compared to last month’s rise of 0.4%, bringing annual inflation to 7.1%. Following this, the Federal Reserve met on Wednesday to announce a hike in borrowing interest rate on the U.S dollar by 50 basis points (bps) to reach 4.5% – the largest rate increase since 2008’s financial crisis.
This rate is smaller compared to the 75 bps increase made by the central bank for four consecutive months leading up to December. The Fed has been increasing interest rates this year in order to get inflation under control, which currently stands at a 40-year high. As noted by the BLS, inflation for November was up 7.1% compared to last year, with core CPI jumping 0.2% in the month.
“Recent indicators point to modest growth in spending and production. Job gains have been robust in the recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” stated the Federal Open Market Committee (FOMC).
The Fed committee which blamed the war in Ukraine and related events as factors contributing to the rising inflationary pressure, aims to bring down maximum inflation to its targeted 2% in the long run. According to the central bank, this objective is only achievable by continuing to increase the federal fund rates in 2023 with an additional 75 bps hike expected by the end of the year. The FOMC also noted that it will continue reducing its holding of treasury securities, agency debt and agency mortgage-backed securities as part of plans to reduce the Federal Reserve’s balance sheet.
“The committee anticipates that ongoing increases in the target range will be appropriate in order to sustain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
After the Fed signalled that it will be raising interest rates going into next year, the prices of precious metals, crypto and equity markets tumbled. The price of Bitcoin (BTC) and Ethereum (ETH) took a deep dive on the low side today, with BTC currently trading at $17,708 – down over 3% since the announcement was made. Ethereum is priced at $1,291 – down over 2% in the last 24-hours. Following the news, Dow Jones Industrial Average fell by 109 points – losing 0.3% after being 287 points higher earlier in the day, while the S&P 500 dipped over 0.6%. At the time of writing, Gold is trading at $1,795 – dropping 0.7% since the Fed’s announcement, while silver is priced at $23.34, having lost over 2% of its value.
Cryptocurrencies closely follow U.S stocks because they are considered “risk assets” due to their high price volatility compared to less risky assets like U.S Treasury bonds or dollars.