The Federal Reserve raised interest rates by half a percentage point and announced its plan to shrink its massive bond holdings, decisive measures aimed at curbing the fastest inflation in four decades. After the Fed decision, which came in line with the expectations, the gold price recovered slightly, while the Bitcoin price, which is seen as digital gold, made a good exit for now.
Bitcoin recovered while gold did not react seriously to the Fed decision
Today, the highly anticipated Fed’s interest rate decision was announced and the Fed marked the largest rate hike since 2000. At the same time, the Fed is rapidly withdrawing its support from the economy by shrinking its balance sheet of 9 trillion dollars. As the Fed’s decision came in line with expectations, gold prices did not react seriously and rose 0.30% to $1,973.40 at the time of writing. On the other hand, gold’s digital rival Bitcoin reversed its decline and rose to $39,000 with a 3% gain in the last 24 hours.
However, as money becomes more expensive to borrow, policies are likely to bounce off markets and the economy. The rapid withdrawal of monetary aid is seen as a sign that the central bank is getting serious about cooling the economy and the job market as rapid inflation continues and officials become more nervous that it may be more permanent
Fed, realized that inflation will not fall by itself!
Fed officials have spent most of 2021 hoping that inflation will correct itself as supply shortages subside and the economy stabilizes after early pandemic cuts. But normalcy has not yet returned, and inflation has only accelerated. Now, the new pandemic-induced quarantines in China and the war in Ukraine are pushing the prices of goods, food and fuel even higher. At the same time, workers in the US are facing a shortage of supplies and wages are rising rapidly, causing prices for services to rise as consumer demand remains strong.
In the Federal Open Market Committee statement in May, the Fed stated that the board is extremely wary of inflation risks, adding, “As the lockdowns in China worsen supply chain disruptions, the invasion of Ukraine and related events have additional upsides on inflation. and likely to put pressure on economic activity,” he said.
Fed officials have decided they no longer have the luxury of waiting for inflation to come down on its own. Now, the debate is over how fast they should act to rein in the economy. Central bankers hope to act decisively enough to stop the boom in prices without curbing growth so aggressively that it plunges the economy into a painful recession.
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