Best Way to understand Rate Hikes and the Fed How Do They Affect Crypto Markets
Rate Hikes and the Fed,
The Fed, or Federal Reserve, is the agency in charge of keeping the US economy running. As the United States’ central bank, it has three basic goals:
Maximum utilization
Price stability (i.e., a low and consistent inflationary ratio)
In the US economy, interest rates are moderate.
Maximum utilization: The Fed tries to achieve the highest level of sustainable employment possible, taking into account factors such as job growth, labor force participation, and the unemployment rate. The Fed may develop an economic climate that favors job growth and labor market stability by changing its monetary policies.
Price stability is critical for generating economic certainty, preserving the real worth of money, and encouraging long-term economic progress. As part of its long-term inflation target, the Fed aims for 2% inflation over time.
Its mandate was price stability.
Long-term interest rates that are moderate: Maintaining moderate long-term interest rates can produce long-term economic growth and investment. The Fed can indirectly influence long-term interest rates through affecting short-term interest rates, such as the federal funds rate, and so contribute to a stable and healthy financial climate.
In other words, the Federal Reserve must foster a climate in which prices remain stable and new jobs may be produced. To accomplish this, it monitors economic risks and makes regular changes to monetary policy.
What Exactly Is Monetary Policy?
Monetary policy is a collection of rules established by a country’s central bank to govern the flow of money to the economy and achieve the major goals we just outlined (maximum employment, low and stable inflation, and moderate interest rates).
The Federal Reserve can alter monetary policy in order to battle inflation and rising prices, create new jobs, or mitigate the consequences of a recession. Monetary policy can thus be considered as a toolbox for central banks to use in steering the economy in the desired direction.
The most well-known monetary policy tools are quantitative easing, open market operations, interest rate changes, and reserve requirements but central banks can use many more.
What Exactly Is a FOMC Meeting?
The Federal Open Market Committee (FOMC) meets eight times a year at the very least. If the situation warrants it, the FOMC may hold additional emergency meetings. This most recently occurred following the bank run disaster that affected two major US banks.
At the meetings, FOMC members assess the economic environment and potential threats, and decide whether to modify monetary policy. One significant example occurred after the epidemic, when the Federal Reserve resorted to pumping capital into the economy at extraordinary rates. While this helped to solve problems in the short term, it had a detrimental side effect: inflation surged, culminating at 9.1% year on year in June 2022.
The FOMC has been attempting to reduce inflation.Since then, interest rates have risen, potentially affecting employment and causing an economic collapse. As you can see, the FOMC’s task is not easy.
What Are Interest Rate Increases?
Back to interest rate increases! An increase in the federal funds rate, the interest rate at which commercial banks can borrow and lend money to one another overnight, is referred to as an interest rate hike. The federal funds rate is a range of rates at which banks can borrow or lend.
Since inflation become uncontrollable, the FOMC has voted to raise interest rates nine times, bringing them from 0.25% to 5% in just over a year.
At the point of typing, the federal funds rate ranged from 4.75% to 5.00%.
When the federal funds rate rises, so does the cost of capital. It raises the cost of borrowing for banks, who then demand higher interest rates.
Customers receive interest rates from them. Mortgages become more expensive, as do business loans and credit card debt penalties. In other words, by raising interest rates, the Fed makes it more expensive to invest or spend money, causing the demand curve to fall.
If you’ve studied economics, you’ll know that a drop in demand usually leads to a drop in price. deploying rate hikes to reduce prices (and thus inflation) is like to deploying a fire sprinkler!
Do Interest Rate Increases Affect Crypto Markets?
Adjusting the federal funds rate does more than only combat inflation; its repercussions are felt across the economy, including financial markets. Changes in the federal funds rate are famously volatile in the stock market. When the Fed lowers interest rates, for example, stock markets normally rise because the cost of conducting business falls, increasing the profitability of publicly traded corporations.
Conversely, an increase in interest rates typically causes share values to fall as the cost of doing business rises, reducing profitability. Because of the correlation between stock markets and cryptocurrency, a bearish reaction in the stock market leads in a decline in the value of your tokens.
Nonetheless, the most significant short-term repercussions of rate increases are psychological. Markets excel at pricing information, andThey frequently move in response to FOMC decisions. For example, on March 22nd, the market moved higher, anticipating a stop in rate hikes. When the Fed announced the recent 25 basis point rate hike, the Bitcoin price fell 7.9%.
The news of a 25 basis-point boost came as a surprise at the start of this rate hiking cycle, resulting in a sharp sell-off. The impact of fresh rate rise choices has lessened little now that we’ve had nine consecutive raises. While there is still some volatility, the market normally retraces the drop pretty effectively, getting the market back to where it was prior to the rate hike announcement. The market has become acclimated to rate increases.
Final Thoughts
Overall, it is obvious that the Fed has a significant impact on financial markets. Their quantitative easing campaign drove asset values to all-time highs in 2021, but recent rate hike decisions have sent prices back down.
The market has grown accustomed to rate increases, and their impact on short-term prices has diminished. Interest rate choices are extremely difficult to predict, and their impact on the market is even more challenging. Nonetheless, having a fundamental understanding of the underlying forces behind economies can help you comprehend why markets behave the way they do. But always remember to do your own research before fomo in, let us know in the comment section what you think.
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