You may have noticed that the year 2022 was dominated by inflation and interest rate hikes. Inflation around the world rose to or above double digits, forcing central banks to intervene. Unfortunately, inflation has still not disappeared and the Federal Reserve, the American central bank, has been forced to think about even higher interest rates.
The Federal Reserve must continue raising interest rates and hold them at a high level to move inflation lower over time, Bank of Richmond President Thomas Barkin says https://t.co/qvrGUNnndG
— Bloomberg (@business) March 4, 2023
Where are interest rates going?
If you ask Thomas Barkin, the president of the Richmond Federal Reserve, there is a scenario where the Federal Reserve pushes interest rates to 5.50 – 5.75 percent. The interest rate is currently in the range of 4.50 – 4.75 percent. That would mean going up another full percent from here.
“That suggests that inflation is a lot more stubborn than many people predicted,” thus Barkin to some journalists at the Stanford Institute for Economic Policy Research. Speaking at Stanford, Barkin shared why he fears inflation could be a lot stickier than hoped.
On the other hand, according to Barkin, it is also possible that inflation will cool a lot faster than what he expects. In that respect, macroeconomics remains a beast that is difficult to predict. He also expects that the Federal Reserve will not have started to cut interest rates around this period next year.
What does this mean for bitcoin?
The big question for us, of course, is what these statements from Barkin mean for bitcoin (BTC). In principle, we have already seen in the past year that interest rate increases do not have a positive effect on the bitcoin price. In fact, last year the price was actually demolished by the higher interest rates.
This is partly because investors can earn a higher guaranteed return from the US government due to the higher interest rates. The interest rate on US government bonds is currently around 5 percent per annum.
As an investor, you can therefore relatively safely achieve a return of 5 percent. In times of uncertainty like this, that can be a lot more attractive than an investment in bitcoin or other crypto. They can rise more, but also entail more risk.