The Fed’s decisions on interest rates have become pivotal moments for crypto markets. Since 2022, when the Fed began aggressively raising rates to combat rampant inflation, digital assets have mirrored volatility in traditional markets.
Recent analysis from Santiment suggests that this correlation is not likely to fade anytime soon; if anything, it is becoming the new normal.
Interest Rates and Market Reactions
According to the analytical platform, each meeting of the Federal Open Market Committee (FOMC) tends to generate significant market reactions. In 2022, when rates climbed from nearly zero to 4.50 percent by December, both crypto and stock markets experienced a substantial decline, with inflation at 9.1 percent.
Santiment’s data suggests that traders often act preemptively, leading to increased volatility in the days leading up to FOMC announcements. The platform analyzed several instances of FOMC decisions and corresponding bitcoin price movements, revealing a recurring pattern: the asset price tended to sharply react to actual rate decisions as well as prevailing macroeconomic sentiment.
In March 2022, after the Fed raised rates for the first time since 2018, the price of bitcoin fell by 5 percent within a week. The decline was even more drastic at 18 percent in June, following a 75 basis point (0.75 percent) increase. However, in September, the crypto market experienced a brief surge of 6 percent after the Fed announced another 75 basis point increase. This rise was largely driven by speculative trading and soon fell back.
The rate increase in March 2023 elicited a different response from bitcoin, with the cryptocurrency rising by 12 percent over two weeks as investors anticipated a slowdown in future increases. This was evident in December of that year, when a 25 basis point rate cut triggered a 15 percent increase in bitcoin’s value, as market participants viewed this decision as a pivot towards easing.
