Fed official’s comments cause bitcoin to fall: no compelling reason to halt liquidity tightening


31st May 2023 – (New York) Bitcoin (BTC) faced selling pressure on Wednesday after a top Federal Reserve (Fed) official said that there was no compelling reason to halt liquidity tightening. The Fed’s tightening has impacted risk assets, including cryptocurrencies.

Federal Reserve Bank of Cleveland President Loretta Mester told the Financial Times in an interview published on Wednesday that she did not see a compelling reason to pause the Fed’s liquidity tightening. Mester added that she would see more of a compelling case for bringing the rates up and holding them for a while until there is less uncertainty about the economy’s direction.

Following Mester’s comments, Bitcoin fell by nearly 2% to $27,021, according to CoinDesk data. Futures tied to Wall Street’s tech-heavy index Nasdaq also fell by 0.38%, suggesting a negative open on Wednesday. The dollar index, which tracks the greenback’s value against major fiat currencies, rose 0.27% to 104.40. Gold, however, remained resilient, trading 0.2% higher at $1,962 per ounce.

The Fed has raised rates by 500 basis points to 5% since March 2022 to tame inflation. Mester’s support for another rate hike and the higher-for-longer stance comes after hotter-than-expected inflation data and validates the recent hawkish repricing of interest rate expectations in the US.

Official data released last Friday showed that consumer spending in the US increased more than expected in April, even as the Fed’spreferred inflation measure, the core PCE, rose to 4.4% on a yearly basis in April from 4.2% in March. Traders no longer expect the Fed to cut rates this year and have fully priced in a 25 basis point rate hike for June, according to the Fed funds futures.

Traders have consistently hoped for the Fed to pause its rate hikes in the first half of 2023 and resort to liquidity-boosting rate cuts in the second half, which is one of the significant reasons behind Bitcoin’s year-to-date gain of over 65%. The cryptocurrency reached a 10-month high of $31,000 in April, while the dollar index dropped over 12% in the seven months to April.

Mester added that the debt ceiling deal removes a “big piece of uncertainty” from the U.S. economy.