Bitcoin and dot plot—how BTC expects to react to Fed’s interest rate projections?

Jaipur (CoinChapter.com) — Bitcoin prices have reversed course after a nascent rally. Also, the US Federal Reserve has sparked fears of early interest rate hikes much before 2024. Will this have a significant impact on BTC’s momentum? Let’s see.

Dot Plot Hints

Since 2012, the Federal Reserve has been providing insights regarding its interest rate projections in the form of ‘dot plots.’ Dot plots translate every interest rate forecast made by the Fed as dots. These, in turn, provide a peek into the degree of growth/depreciation in future borrowing costs. But before we continue further, here’s a short primer on interest rates.

The interest rate (aka fed funds rate) is what the Fed charges other banks in the US for overnight borrowing. The fed funds rate shows up in many consumer interest rates. These include rates on deposits, bank loans, credit cards, and adjustable-rate mortgages.

Fed had kept its interest rate in the 0-0.25% range since March 2020, when COVID-19 became a full-blown pandemic. The central bank intended to keep it the same till 2024 end. But that might change now. If the latest dot plots are believed, we could see a significant upsurge in interest rates much earlier in 2023. This is an antithesis to the Fed’s stance earlier last year, where it asserted to keep them near 0 until 2024.

Per Financial Times, an interest rate hike would also lead to a drop in monthly $120 billion asset purchases by the Fed.

Bad News For Bitcoin

A rate hike by the Fed earlier than expected could be problematic for Bitcoin investors as well. Why? Because it signals that the central bank is not considering rising inflation and consumer prices as transitory. But in fact, looking to put in place measures that will reign in both these demons.

Read More: Gold, Not Bitcoin, Emerges as Safe-Haven as CPI Levels Shoot Up

This translates to reigning in the flow of cash into the financial system of the country. When the Fed’s usually dovish stance becomes less dovish, the BTC market will be affected. Because investors generally consider bitcoin and crypto markets as inflation hedges. In the event of tapering cash flow, market participants will choose to remain risk-averse.

Read More: Billionaire hedge fund manager backs Bitcoin as his inflation trade

The effects have already started showing up in the precious metals markets and US equity markets. Current Bitcoin market conditions also look precarious.

The BTC/USD trading pair remains supported above the crucial 20-day exponential moving average (EMA) line on the daily chart.

But sellers have been lining up since the last two days to book profits. Although owing to the recent run-up, Bitcoin managed to top $41,000, $42,500 remains a crucial resistance worth clearing.