Crypto markets surge as Fed keeps rates unchanged, may scale back asset purchases “soon”

The Federal Reserve issued a statement after concluding a two-day monetary policy meeting, announcing that it would maintain the target range of the federal funds rate between 0 and 0.25%. The Fed also said that it may begin to reduce the scale of asset purchases "soon".

When the coronavirus pandemic began to wreak havoc on the U.S. economy in early 2020, the Fed stepped in, slashing interest rates to near zero and pledging to buy $120 billion worth of Treasury bonds and mortgage-backed securities each month.

Wednesday's announcement foreshadows that these stimulus measures appear to be about to slow down, a so-called "tapering." Investors have long expected the Fed to tighten its monthly stimulus measures as the economic recovery progressed well over the summer. The announcement was in line with investor expectations, with all three major U.S. stock indexes rising slightly by 1%.

In addition, according to the Summary of Economic Projections (SEP) released on Wednesday, Fed officials also raised their inflation expectations and moved the year for a rate hike from 2023 to 2022. The Fed's median forecast is now two rate hikes by the end of 2022, and three officials now expect two rate hikes next year. At the June meeting, only seven Fed officials expected a rate hike soon.

While the Federal Open Market Committee (FOMC) kept interest rates near zero and maintained its asset purchase program, Powell said it would consider tapering "perhaps as soon as our next meeting."

The Committee indicated in December that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and at least $40 billion per month until it had made substantial further progress toward its maximum employment and price stability goals.

Federal Reserve officials generally believe that as long as the economic recovery is on track, it may be "appropriate" to end the asset purchase program around the middle of next year.

“We appear to have made substantial further progress on inflation, so that part of the test is done in my view and in the view of many others,” Fed Chairman Jerome Powell said at a press conference after the meeting. “The real question is about maximizing employment.”

Job gains have averaged 750,000 per month over the past three months, but employment growth slowed in industries such as leisure and hospitality in August as coronavirus cases rose.

Powell was also asked about progress in developing a central bank digital currency (CBDC), noting that the Fed will soon release a discussion paper on the subject.

He said: "With the launch of a large number of private currencies and currency-like products, we are actively evaluating whether to issue a CBDC, and if so, in what form. I don't think we are behind. I think it is more important to do it right than to do it quickly."

The crypto market saw a strong rebound after Evergrande reached an agreement to repay its debts and the Federal Reserve indicated that it would continue its current monetary policy.

Since hitting a low of $39,572 on the evening of September 21, the price of Bitcoin has rebounded 11.3% to an intraday high of $44,021, according to TradingView.

In addition to Evergrande-related developments, recent comments from U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler also weighed on the market as the regulator reiterated plans to instruct the SEC to crack down on cryptocurrencies and the growing stablecoin market.

Bitcoin climbed back towards $44,000 support and Ethereum bounced back towards $3,000 on Wednesday as a market-wide recovery began to take shape.

Powell said the U.S. does not have much direct exposure to the Evergrande situation, but is concerned that the Evergrande default may affect the confidence channel. In addition, Powell does not think the situation in China will spread to the United States, and no one should assume that the Fed can fully protect the market or the economy in the event of a default. He wants to solve the problem of tapering before turning to other issues such as the balance sheet. Regarding the central bank digital currency, Powell said that any decision on CBDC will be a government-wide decision, and CBDC needs broad support from the Federal Reserve.