Fed Announces Biggest Interest Rate Hike in 28 Years; Bitcoin Falls

The Federal Reserve on Wednesday raised interest rates by 75 basis points, or three quarters of a percentage point, marking the biggest hike in 28 years, in an ongoing effort to bring down soaring inflation that has roiled the economy along with markets from stocks and bonds to cryptocurrencies.

The U.S. central bank also announced that it would continue reducing the size of its balance sheet at the rate announced in May, according to a statement by the Federal Open Market Committee (FOMC).

The Fed Funds rate will rise to a range between 1.5%-1.75%, according to the Fed. Bond traders are pricing in a range of 3.25%-3.5% by the end of the year, implying an unusually rapid and harsh pace of monetary tightening, according to Goldman Sachs.

"Overall economic activity appears to have picked up after edging down in the first quarter," the Fed statement reads. "Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures."

The last time the Fed raised its benchmark rate by 0.75 percentage point was in 1994.

Given that May’s Consumer Price Index came in hotter than expected, at a fresh four-decade high, markets already started reacting to the possibility of a faster rate hike in the days leading up to this week's Fed meeting. The closed-door meeting started on Tuesday and culminated with the statement on Wednesday at 2 p.m. ET.

"Markets loathe uncertainty and unpredictability," said Josh Olszewicz, head of research at Valkyrie. "A decrease in downward volatility will only likely be achieved with a pause or reversal of the current Fed policy and direction."

Bitcoin (BTC) was down 5.3% in the minutes since the Fed statement. Most analysts had already priced in the hike in the days leading up to the meeting.

During his press conference in May, Fed Chair Jerome Powell had ruled out the possibility of a 75 basis point hike, saying that it is “not something that the committee is actively considering.” Instead, central bankers had hinted at two 50 basis point hikes in June and July.

But the situation changed after the last Consumer Price Index report showed an acceleration in inflation to 8.6%, rather than a slowdown as expected, and Powell had mentioned at his last conference that if the Fed doesn’t see inflation pressures “abating” and “coming down,” the central bank would “consider moving more aggressively.”

In addition to the statement, the Fed published a revised quarterly economic projections, or “dot plot,” a pictorial representation of Fed officials' projections for the central bank's key short-term interest rate.

Members expect the fund’s rate to go up to 3.4% in 2022 and 3.8% in 2023.