Amid the rising inflation in the United States, the Fed under the leadership of Jerome Powell has continued to hike interest rates. Before 2020, the country experienced a low period of inflation. However, upon the invasion of the coronavirus pandemic, things began to go the other way. The crisis created various market problems, thereby causing the prices of goods and services to spike aggressively. Similarly, the inflation rate became more aggressive following the invasion of Ukraine by Russia. This war led to a total disruption in the supply of essential commodities from the warring countries. Recall that the duo are great suppliers of necessities and the various sanctions imposed by the U.S. on Russia made disruptions inevitable.
Fed and its battle against rising inflation
As part of the efforts to battle the rising inflation, the central bank of the United States, known as Fed, has been up and doing. In the past two years, the apex bank announced multiple hikes in interest rates. In its projections, the simultaneous increase in the rates will cause inflation to start declining from 2023 and reduce to about 2% by 2025. It started raising the rates around March 2022. According to findings, these rate hikes amount to 5 percentage points on its benchmark and have so far increased borrowing costs for all consumer items. As a matter of fact, the efforts triggered 30-year mortgage rates to about 7%.
Meanwhile, around June 2023, the Fed after a two-day meeting decided to pause the marathon efforts. Before making a pause, it has already increased the rates ten consecutive times. The decision to pause the rate hikes left the Fed’s key borrowing rate in a target range of 5%. The apex bank wants to wait to see the impact of the policy in the next six weeks before taking further steps. Certainly, there are indications that there will be more hikes before the end of the year.
Does interest rates affect crypto?
The whole issue boils down to the state of the economy during inflation and the efforts of the Fed to combat it. Soaring inflation will leave the Fed to consider increasing interest rates. Exploring this option by the Fed is considered a way of discouraging individuals and businesses from evaluating loans when inflation ravages the economy. Low-interest rates often encourage more loans and spending from individuals and business owners. Consequently, piling more pressure on the economy.
Each time the Fed increases the interest rate, the crypto market reacts by positing a noticeable decline. The reason isn’t far-fetched as an increase in interest rates implies a decrease in the value of the U.S. dollar. With that, the crypto market will experience a decline in the volume of investment. In a reverse pattern, the crypto market tends to record more influx of investment if the Fed decreases its rate. This is due to how investors often turn to crypto as a good investment alternative or consider other options.
Generally, the crypto market often endures a high degree of volatility each time the Fed meeting is near. During that period, crypto investors often pay stern attention to the outcome of the meeting. This is due to how the decision of the Federal Reserve will have a direct impact on the state of the crypto market. However, the impacts are mostly minimal if negative, that is if the Fed increases its rate. This is due to how cryptocurrency has proven to be an effective hedge against inflation over time. When interest rates are low, the capacity of cryptocurrency to store value can help investors hedge against erratic fiat and its purchasing power. With that, many investors often consider crypto as a safe haven for their investment.
Conclusion
Despite the economic pointer of a potential impact of the Fed’s interest rates on virtual assets, cryptocurrency has strived against all odds. Crypto most especially Bitcoin has placed itself ahead of other traditional inflation hedges like Gold and Real Estate. Irrespective of the impact of the Fed rates, cryptocurrency without a doubt has helped changed existing narratives about the world economy and finance.