Bitcoin loves a dovish Federal Reserve.

The cryptocurrency escaped its gloomy short-term downside outlook right after the US central bank announced that it would keep its expansionary policies steady until 2023.

BTC/USD rallied from $53,000 to just shy of $60,000, with traders believing that near-zero interest rates and $120bn monthly asset purchasing would lower short-term Treasury yields and depreciate the US dollar. In turn, the Fed’s policy would increase Bitcoin’s appeal as an alternative safe-haven.

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Bitcoin corrects lower from its intraday high above $59,000. Source: BTCUSD on TradingView.com

Jerome Powell…

…the Fed chairman wants investors to believe that he has their back even though the US economy recovers faster than expected. In the US central bank’s very own projections, the country’s gross domestic product expects to rise 6.5 percent this year compared to its December forecast of 4.5 percent. Meanwhile, it expects the unemployment rate to slip to 4.5 percent instead of 5 percent.

The Fed’s preferred measure of inflation, the Core Personal Consumption Expenditure Inflation, will also rise to 2.2 percent, almost 0.2 percent above the central bank’s target rate. Nevertheless, Mr. Powell wants to continue their dovish policies until 2023.

Justin Lahart, a financial journalist at the Wall Street Journal, writes that the Fed would have difficulty convincing investors that it would stick to its expansionary plans even if the US economy recovers better than anticipated while inflation picks up.

“Where things could get really complicated will be if the economy ends up doing even better than the Fed expects,” he wrote in HIS LATEST REPORT. “Then the central bank might need to move up its rate-increase expectations while still trying to assure investors that it really isn’t the guy it used to be.”

Bitcoin…

…surged by more than 1,500 percent from its mid-March low of $3,858 (data from Coinbase), hitting $61,788 earlier in March 2021 amid a lower interest rate environment. Any potential hikes in lending rates would make the US dollar attractive to foreign investors, thereby reducing the appeal of the assets that performed extremely well when the greenback was falling in 2020.

It does not mean the Fed would surprisingly wake up one day and decide to raise interest rates. But one cannot ignore that the number of central bank officials that want rate hikes has increased from five in December to seven in March. Growth prospects can shift more policymakers towards the hawkish side, providing headwinds to the Bitcoin price rally.

Yet, Bitcoin expects to do well on anti-inflation calls. A higher consumer price inflation, coupled with the long-term impact of the quantitative easing on the US dollar’s value and bond yields, could boost investors’ appetite for the cryptocurrency. Traders should tread ahead with caution should potential rate hikes jitter the crypto uptrend in the medium-term.