Fed Faces Tough Decision: Interest Rate Hike or Banking Stability?

Following a tumultuous week in traditional markets accompanied by substantial gains, Bitcoin and alternative cryptocurrencies have ascended to price levels unseen in nine months.

by Faruk Imamovic
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Fed Faces Tough Decision: Interest Rate Hike or Banking Stability?

Following a tumultuous week in traditional markets accompanied by substantial gains, Bitcoin and alternative cryptocurrencies have ascended to price levels unseen in nine months. The bear market increasingly appears as a distant memory from 2022, with former resistance levels crumbling as bulls endeavor to solidify their stance.

In the coming week, several hurdles must be surmounted. The Federal Reserve will determine its subsequent actions concerning interest rates, which will likely result in market volatility. Unanticipated developments in the banking sector will only serve to exacerbate this instability.

Consequently, market volatility is expected to persist, with any unforeseen banking sector events further fueling uncertainty. Meanwhile, Bitcoin's own ecosystem is anticipated to strengthen more than ever. For trader, analyst, and podcast host Scott Melker, known as "The Wolf of All Streets," the implications are clear.

Engineer and trader Tree of Alpha encapsulated the situation, stating, "Next week's FOMC is gearing up to be one of the most interesting ones in a while, with no one really agreeing on what's gonna happen."

A Dubious Cycle of Interest Rate Hikes

The week's most significant event is the Federal Reserve's decision on March 22nd to either raise interest rates or maintain the status quo.

The Federal Open Market Committee (FOMC) is grappling with a formidable challenge to its current quantitative easing policy, which has been in place for the past 18 months. The unfolding banking crisis has cast doubt upon the Fed's capacity to persistently raise interest rates, a policy some commentators contend is the death knell for struggling regional banks.

According to CME Group's FedWatch tool, the consensus on March 20th leaned towards a 25-basis-point hike rather than pausing hikes altogether. A week prior, Goldman Sachs predicted rate stagnation, while Nomura anticipated a rate cut.

The Federal Reserve currently finds itself in an unenviable position. Increasing interest rates would help rein in inflation but could further "punish" the economy, potentially sparking a new wave of bank failures. The Fed faces a daunting choice: either continue raising rates to combat the still-high inflation rate of 6%, risking further bank failures and panic, or pause rate hikes to maintain banking sector stability while risking resurgent inflation.

Neither scenario bodes well for the markets in the long run. The Kobeissi Letter, a financial commentary resource, analyzed the long-term rate hike trajectory, noting, "This week, the long anticipated March Fed interest rate decision comes out.

Currently, markets are pricing in a 62% chance of a 25 bps rate hike. However, markets also see 100 bps of rate cuts by December." Kobeissi and others have also questioned how bank stocks will respond at the next Wall Street opening, given the latest government actions over the weekend.a

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