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Cryptocurrency prices faltered on Wednesday as investors analyzed comments from the Federal Reserve that provided new insights into the U.S. central bank’s fight against inflation.
Policymakers’ decision to leave interest rates unchanged for the 11th consecutive month was a foregone conclusion, based on movements in the Fed’s futures markets. In its most restrictive stance in more than 20 years, the Fed held the borrowing rate reference in a range between 5.25% and 5.50%.
This month’s release of the so-called “dot plot,” however, suggests that U.S. central bank officials have seen a notable change in financial conditions since March. The Fed, in its most recent summary of economic projections, had forecast three rate cuts through the end of the year.
The dot plot released Wednesday suggests that Fed policymakers now think a rate cut may be more appropriate, interpreted by the market as an aggressive signal. The projection went beyond the two rate cuts that economists had expected the Fed might telegraph, as it seeks to keep rates higher for longer amid a strong economy and U.S. job market.
Cryptocurrency prices had risen earlier in the day on news that inflation had slowed to 3.3% in the 12 months to May. The report indicates that consumer prices for American goods and services rose slightly less than economists expected last month.
After the Fed’s announcement, Bitcoin and other cryptocurrencies plummeted. Just 15 minutes after the Fed’s move, for example, the price of Bitcoin quickly fell 1.2% to around $69,000 from $69,900. Meanwhile, the prices of Ethereum and Solana also fell at similar rates.
In recent months the Fed has said it will not cut rates until it has “gained greater confidence that inflation is moving sustainably towards 2%.” Federal Reserve Chair Jerome Powell confirmed this position on Wednesday and said: “So far this year, the data has not given us greater confidence.”
“Recent indicators suggest that economic activity has continued to expand at a strong pace,” Powell added in a note. “There has been further modest progress towards the Committee’s 2% inflation target in recent months.”
Before the conclusion of the Fed policy meeting, futures traders written in pencil a 61% chance that the Fed will cut rates in September, likely giving a boost to the US economy through lower borrowing rates. This figure fell to 59% after Powell’s written remarks were published.
Not long before U.S. inflation peaked at 9.1% in June 2022, the Fed began raising interest rates from near zero to cool a red-hot economy. Although inflation has fallen significantly since then, Powell said Wednesday that the U.S. central bank’s attempt to reach 2% is not yet over.
Powell pointed to Wednesday’s consumer price index report, where inflation remained stable on a monthly basis in May, as a sign of potential progress. “Let me say we welcome today’s reading and hope for something similar,” he said.
“The Committee would be prepared to adjust the monetary policy stance as appropriate if risks emerge that could prevent the achievement of the Committee’s objectives,” Powell added, including “maximum employment” among U.S. workers.
The price of so-called risk assets, including stocks and cryptocurrencies, typically comes under pressure as interest rates rise and the payments for holding cash and U.S. Treasuries become more attractive. Investors predict the opposite would happen if the Fed eases U.S. monetary conditions.
“We can’t know what the future holds, but in the meantime we have made good progress on inflation with our current position,” Powell said, adding that the Fed is looking for a gradual decline in inflation and greater balance in the market of work. “We’re making good progress here.”
By Andrea Hayward
Editor’s note: This story was updated after publication to add an additional quote from Powell.
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