Market volatility spikes after Powell hints Fed could slow rate hikes amid banking stress

Federal Reserve Chair Jerome Powell said on May 19 that the interest rates may not have to be increased as much as previously estimated to slow down the economy.

Powell said that “developments” in the banking sector are resulting in tighter credit conditions which will likely impact economic growth and inflation. However, he added that the extent to which credit tightening is affecting inflation is uncertain.

Powell made the comments during his talk at the Thomas Laubach Research Conference.

Inflation will ‘take some time’

In terms of guidance, Powell said that bringing inflation down will “take some time” but the Fed is changing its stance toward policy firming as the “risks of doing too much versus too little are becoming more balanced.”

He added that the Fed has yet to decide whether further firming is necessary and is now in a position where it can “afford to look at the data and the evolving outlook” to make “careful assessments.”

Powell said:

“We have come a long way in policy tightening and the stance of policy is restrictive. We face uncertainty about the lagged effects of our tightening so far, and about the extent of credit tightening from recent banking stresses.”

Powell said the stress on the banking system is the main thing that will influence decisions around rate hikes for the central bank in the coming months.

However, he clarified that ultimately the Fed’s decision will depend on the state of the economy and the current guidance could change if it were to experience a new shock like the Russia-Ukraine war or the Covid-19 pandemic.

Crypto markets were eagerly anticipating the comments and price action points to the industry reacting positively to the news.

Crypto reacts

Bitcoin experienced a spike in volatility following Powell’s comments on interest rate hikes and briefly broke $27,000, before falling to a 24-hour low at roughly $26,718.

However, markets seem optimistic about the Fed’s coming actions as the flagship crypto is trending upwards despite minor volatility in the hours since the live stream.

Bitcoin was trading at $26,927 as of press time.

Ethereum saw similar volatility in trading but the price range was much tighter. The second-largest cryptocurrency spiked up to $1,823 following Powell’s talk and then saw a sharp decline to $1,803 before trending back up.

Ethereum was trading at $1,818 as of press time — only a few dollars short of its 24-hour high.

The vast majority of the top 100 cryptocurrencies and all of the top 10 cryptocurrencies were trading in the green on a 24-hour basis.

Most major cryptocurrencies recorded a positive spike in price action following Powell’s speech, pointing to optimism in the crypto markets.