The Federal Reserve announced the largest rate hike in 22 years, and Bitcoin rose to $40,000

On Wednesday afternoon, the Federal Reserve announced that it would raise interest rates by 0.5 percentage points (0.5%) for the first time since May 2000, in line with market expectations. Fed Chairman Powell said at a press conference that he was not "actively considering" a larger rate hike, emphasizing the "soft landing" of the economy, suggesting that a 0.5% rate hike may be considered in the next two meetings. The news soothed the crypto market. According to Bitpush terminal data, Bitcoin rose to nearly $40,000 in a short period of time, a 24-hour increase of 5.6%.

The Fed also announced plans to reduce its $9 trillion asset portfolio by $47.5 billion per month over three months and by up to $95 billion per month starting in September.

The rate hike comes as U.S. inflation has surged to its highest level in 40 years, and by making it more expensive to borrow money, the Fed hopes to cool the economy.

The federal funds rate, or the overnight lending rate between banks, will rise to a range of 0.75% to 1%. The Fed cut rates to near zero in March 2020 to stimulate markets as coronavirus-related lockdowns hammered the economy and kept them there until earlier this year. Interest rate futures data show a 94% chance that the Fed will raise its benchmark short-term borrowing rate to at least 2.75% by the end of the year.

Crypto traders closely monitor rate hikes as proponents view Bitcoin as a good hedge against inflation.

Scott Bauer, a former Goldman Sachs trader and current CEO of Prosper Trading Academy, said that ahead of the interest rate meeting, institutional outflows from Bitcoin hit a record high as market participants waited for the "shoe to drop."

At press time, the Bitcoin Fear & Greed Index fell into the “Extreme Fear” zone (index: 21), indicating low risk appetite among crypto traders.

The index has been in the “fear” zone for the past few months, marking a decisive shift from the “extreme greed” sentiment of last November.

According to Alternative.me, which constructs the index, an increase in trader sentiment would require BTC’s price to rise, along with a gradual increase in trading volume and volatility. Generally speaking, high buying volume in a daily positive market indicates bullish sentiment.

BTC has outperformed alternative cryptocurrencies (altcoins) so far this year, but has given up some of its lead over the past few days, which could indicate that trader sentiment is bearish or neutral in the short term.

Marcus Sotiriou, an analyst at UK digital asset broker GlobalBlock, wrote in a newsletter: "Today is a huge volatility as the Federal Open Market Committee (FOMC) meets to announce how much interest rates will be raised, an event that caused most investors to sell stocks and cryptocurrencies over the past month because they were worried about a 50 basis point rate hike... Although rate hikes are generally bad for these risk assets, the current US consumer data is strong, so I remain optimistic that the results of this rate hike will not be catastrophic and that the expectations of this rate hike have been digested by the market in advance."

Jeffrey Howard, head of institutional sales and business development at OSL, took a different view, telling Blockworks: “Risk assets don’t perform well in a rising rate environment, so overall I think the market is bearish.”