The Crypto market continues with its downward trend. However, with its announcement, the Federal Reserve has added fuel to the fire in the crypto world.
On 26th January 2022, the Federal Reserve said they would start increasing interest rates. This effort will be a part of a “series of interest rate hikes.”
Initially, the Federal Reserve had decreased interest rates to revive the economy. As we know, the entire world has been facing the onslaught of the coronavirus pandemic.
Apart from other effects, the pandemic is the reason for loss of livelihoods and economic devastation.
Why Did The Fed Reverse Its Policy?
When there are economic disasters, it is the central bank’s job to get the economy back on track. To do this, the central bank changes the country’s monetary policy.
As seen during the pandemic, the Central Bank has an “expansionary” monetary policy in times of recession. Additionally, expansionary policies aim to boost demand and spending in the economy.
This is precisely what the Central Bank of the U.S., the Federal Reserve, has done during the pandemic.
The Fed has been actively reducing interest rates to allow people to spend and demand more. However, expansionary policies have a drawback. They can increase inflation in an economy as well.
This is because people are willing to spend money on goods and services. Goods and services are limited in nature.
As people start demanding more, prices start shooting up.
According to news agencies, inflation is at an all-time high in America. Experts say that this is the highest inflation in the last four decades.
When prices of goods and services increase, our purchasing power reduces. Consumers in the U.S. are suffering due to the rise of inflation.
Hence, the Fed is backtracking on its expansionary monetary policy. The Federal Reserve Chairman, Jerome Powell, signaled that the Central Bank would soon increase interest rates to stabilize the economy.
How Do Interest Rates By Federal Reserve Affect The Crypto Market?
During the initial days of cryptocurrency, the digital asset was not sensitive to the movements of interest rates. This is because it did not have as many investors as today.
As more and more people have started adding cryptocurrency to their portfolios, the crypto market is positively correlated with the stock market.
Riskier assets in the equities and crypto market are highly volatile in the face of such announcements.
We can see the effects in the crypto market as sell-offs continue, with $116 billion exiting the market in the last 12 hours. Furthermore, the stock market has also taken a hit.
Indexes like the S&P and Nasdaq are losing 2.25% and 3.75%, respectively,
Additionally, in terms of total market capitalization, the crypto market has reduced to $1.70 trillion. The new year has spelled trouble for the crypto market as it declines by 26%