The Federal Reserve says higher interest rates could increase stress on banks, but what about Bitcoin?

The Federal Reserve says higher interest rates could increase stress on banks, but what about Bitcoin?

Historically high interest rates in the United States could "exacerbate stress" in an already unstable banking system, a member of the Federal Reserve Board of Governors said on Wednesday.

The governor also hinted that the central bank may decide not to raise its key interest rate at the next Federal Open Markets Committee (FOMC) meeting, which could have an impact on Bitcoin price.

Rising interest rates and rising debts

Fed Governor Philip N. Jeffersonnoticedon the economic prospects of the US financial system during a speech at the 22nd Annual International Conference on Policy Challenges to the Financial Sector in Washington DC

While the governor claimed that the banking system had "stabilized" after several bank runs and foreclosures in March, he acknowledged the risks associated with elevated short-term interest rates, which are "five percentage points higher than just over a year ago." ”

As Jefferson explained, the effects of monetary policy operate with “long and variable lags” that are not fully accounted for in one year alone. He forecasts slow growth for the rest of the year amid "heightened uncertainty" and a decline in household savings as well as tight financial conditions.

While the governor isn't predicting a recession, he claimed that the combination of low profits and high interest rates "could test companies' ability to service their debt." “

“In addition, higher interest rates could further exacerbate stress among banking institutions, particularly those that are heavily invested in longer-dated assets and have a relatively high share of uninsured deposits in total deposits,” he continued.

Will the Fed “skip” a rate hike?

When Silicon Valley Bank (SVB) experienced a bank run in March, it came after the company disclosed a $1.8 billion realized loss on its long-term bonds.

Ultimately, insurance coverage didn't matter to SVB because the Federal Reserve, Treasury, and FDIC had agreed at the time to fully bail out all depositors.Exception for systemic risks.”

Critics of the movenotedhow the central bank's rescue efforts reversed much of its progress in trying to drain liquidity from the economy, which could once again contribute to inflation in assets like Bitcoin.

The governor expressed the idea that the Fed could keep its key interest rate "steady" at an "upcoming meeting," but that this should not be interpreted as the Fed hitting "the maximum interest rate for this cycle."

“Indeed, skipping a rate hike at an upcoming meeting would allow the committee to see more data before making decisions on the extent of further monetary tightening,” he concluded.

Rising interest rates caused Bitcoin and stocks to decline throughout 2022, meaning an impending peak interest rate may be bullish for the asset. That is, analysissuggeststhat Bitcoin may not be as affected by interest rate hikes as it was last year.

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