Fed to hike interest rates despite ongoing war in Ukraine – Will Bitcoin benefit?

Key Takeaways:

• The Federal Reserve and its global counterparts plan to go ahead with interest rate hikes in March, albeit at a more reserved pace.
• The war in Ukraine caused the initial plans to halt, but the growing inflation calls for stimulus cuts, experts say.
• Bitcoin could benefit from the global turmoil, providing hedge against economic instability.

YEREVAN (CoinChapter.com) – Money markets suggest the U.S. Federal Reserve will proceed with the interest rate hikes in March, despite the raging military crisis in Ukraine.

The situation concerning the markets is “fluid,” as the economy has been receiving conflicting impulses from the growing inflation on the one hand and the most violent war in Europe since WWII on the other.

Also read: Ukraine invasion sparks debate on interest rate hikes — what does it mean for Bitcoin?

Notably, the Fed’s increase of interest rates is a tool to keep inflation in check. Moreover, the U.S. Bureau of Labor Statistics reported a 7.5% inflation in Jan. 2022, the highest in nearly four decades. Thus, many experts believe the interest rate hikes are long overdue.

For instance, senior Mizuho economist Colin Asher asserted that “when inflation is 6% to 7%, inactivity is not an option.”

However, as CoinChapter reported earlier, expert opinions were divided on the matter. For example, Mohamed El-Erian, an advisor for Allianz&Gramarcy firm, voiced his worries on CNBC’s Squawk Box on Feb. 24, when Russia invaded Luhansk and Donetsk regions after weeks of building tension on the border.

[The war] takes the 50 basis points completely off the table. It takes the 8-9 hikes, that people were talking about for this year, off the table. And thankfully so. […] I didn’t think the U.S. economy could accommodate and live with such slamming of the breaks.

The Fed will have to be more careful and tolerate higher inflation.

Mr. El-Erian asserted.

Interest rate hikes despite the war

The Fed and its international counterparts will not hesitate to deliver the first interest rate hike in March. Namely, the Bank of Canada (BoC) announced it would be “forceful” in tackling inflation, as the latter swelled over 5%. Moreover, the Bank of England mirrored the incentive, expecting to raise rates by 25 bps.

Despite the “forceful” intentions, the interest rate hike expectations for all mentioned central banks were lower than the estimations before the Ukraine conflict.

Also read: Ruble under threat as SWIFT bans Russia from global banking system; Bitcoin rebounds. 

Jim Caron, the chief fixed-income strategist at Morgan Stanley Investment Management, called the latest events “a double-edged sword” and offered further comments on the matter.

There has been a recalibration of rate expectations and that has become very apparent with the pricing out of a 50 bps (Fed) hike for March. So, the question becomes one of trying to figure out what it means for the Fed.

said the expert.

However, if European central banks are more likely to suffer Russia-linked setbacks, the U.S. Fed might have less to fear. Thus, further stimulus cuts are likely to start shortly, influencing the crypto market in the process.

Will Bitcoin benefit?

Bitcoin’s ‘category’ within the fiat economy paradigm caused much speculation. The digital asset established a safe-haven status amid the pandemic in 2021, offering traders a hedge against the rising inflation and the weakening dollar.

The incentive changed in Q4 2021 – Q1 2022, as the flagship cryptocurrency correlated with the risky assets instead, such as equities. Moreover, some experts believe Bitcoin regained its safe-haven category alongside gold against the global implications of the war in Ukraine, citing the recent 18% rally.

As of the European session on Mar. 2, the correlation with gold was ongoing. In unison with gold, the BTC/USD exchange rate slid below the support/resistance line at $44,000 and stood at approximately $43,900.

Also read: Bitcoin regains safe-haven status as BTC rallies over $44K amid Ukraine crisis. 

The crypto market depends on the U.S. economy and dollar strength. However, it is also heavily influenced by the global geopolitical situation. The interest rate hikes aim to help the dollar get back on its feet, but Bitcoin’s safe-haven status might persist as long as the conflict in Ukraine and the worldwide echoes continue.

If traders turn to Bitcoin to escape the economic turmoil, the fund inflow will put more weight behind the buying pressure and further fuel the rally.