What Happens to Bitcoin if the Fed Raises Rates in July?

Will bitcoin be under fire if the Fed hikes the rates next week?

With the latest Consumer Price Index data for June already out, all economic eyes have now turned to the United States Federal Reserve and the upcoming FOMC meeting scheduled for the end of July.

Although inflation has cooled, there are still those pushing for an interest rate hike during the next meeting. The question is: what could happen to BTC and its price stagnation if that’s the case?

Big Macro Test Ahead?

The odds declined over the past week or so after the June inflation data showed a substantial drop to 3.5%. While that might be more misleading than it sounds, given the fact that oil prices are up in July due to the ceasefire breakdown, data from CME FedWatch show that experts believe there’s an 85% probability that policymakers will leave rates unchanged. In contrast, the odds of a 25-basis-point increase stand at a more modest 15%.

Those odds shifted after the CPI announcement on Tuesday given the softer-than-expected reading, which reinforces the market’s expectation that the Fed will not pivot on its current strategy. Nevertheless, there are some who continue to sound increasingly hawkish, including new Fed Chair Kevin Warsh and Dallas Fed President Lorie Logan.

Higher interest rates have been seen as a roadblock for BTC and other risk-on assets, as investors tend to become more defensive. Higher borrowing costs strengthen the appeal of lower-risk investments such as Treasury securities, while reducing liquidity throughout financial markets.

The latest major example of bitcoin plunging following the Fed’s aggressive tightening cycle was in 2022/2023. However, today’s market differs from previous cycles.

Will BTC Indeed Crash?

A large portion of the market reaction would likely depend on whether a rate hike catches investors completely off guard. Markets overwhelmingly expect rates to remain unchanged; an unexpected 25- or, more threateningly, 50-basis-point hike could trigger a sharp sell-off across equities, cryptocurrencies, and other risk assets.

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However, the longer-term picture offers a different perspective. If the central bank raised rates because the local economy was still resilient and inflation proved harder to beat, stronger economic activity could continue to support corporate earnings and institutional investment appetite. BTC has proven in the past that it can recover quickly from macro-driven shocks, particularly when long-term demand stays intact.

For now, the landscape appears quite fragile, even as markets anticipate no rate changes. However, inflation is still above the Fed’s target, and several policymakers have doubled down on more hawkish stances, which could lead to some wild price moves if the central bank surprises investors with a July hike.