The Federal Reserve raised interest rates by 25 basis points in February. What impact will it have on cryptocurrencies?

in #federal2 months ago

The U.S. Federal Reserve completed its two-day monetary policy meeting, announcing that it raised the target range of the federal funds rate by 25 basis points to between 4.50% and 4.75%, which was in line with market expectations.


The U.S. economy has performed strongly over the past two years, with inflation stabilizing nearly at 2% If the economic growth rate remains sturdy, Fed Chairman Jerome Powell has indicated that gradual rate hikes would be appropriate.

The crypto market is a separate market, but it is still irrelevant to the Fed at the moment. The Fed’s actions are closely related to the crypto market.

Every action of the Federal Reserve will have some impact on cryptocurrencies, causing the cryptocurrencies market to fluctuate continuously, making investors who pay attention to cryptocurrencies unable to accurately judge the trend of the cryptocurrency market, thus making irrational behaviors. No mater Increase or decrease on interest rate have a big impact on the market.

So, what exactly does a Fed interest rate increase mean? What impact does it have on cryptocurrencies in the end?


First of all, let’s understand why is an interest rate increase, which is an increase in interest rates. What is the purpose of an interest rate increase? Here’s a few reasons;

· To discourage consumption.
· To reduce inflation.
· To encourage deposit rates
· To reduce the rate of money in circulation.

Generally speaking, raising interest rates is bad news for the financial market. The increase in interest rates will attract some users to sell their funds in risky assets and save funds. In such a market, risky assets such as: stocks, funds, For digital currencies, etc., the price will naturally fall, which is the reason for the negative. Gold is saving, so the price will naturally fall

The Federal Reserve is trying to divert capital to the country by raising interest rates. Since the outbreak of the new COVID pandemic, the U.S. has continued to cut interest rates and put $5 trillion worth of money into international markets. The result has been a devaluation of the dollar and an increase in global commodity prices. Now, while the U.S. is in the stage of economic recovery, the Federal Reserve hopes to accelerate the economic recovery by raising interest rates to retain capital back in the economy.

Therefore, we can simply understand: the Fed’s interest rate increase means that the liquidity of assets in the market will be reduced, and the reduction of liquidity is accompanied by a large number of digital assets selling, and the fall of cryptocurrency is a very normal and obvious market reaction.

For example, last November, when the Fed announced that it would begin to scale back its bond purchases and hinted that interest rates would soon rise, cryptocurrencies would be subjected to decrease as well.

Every action of the Federal Reserve has some impact on cryptocurrencies, making the crypto market constantly volatile and making investors who are concerned about cryptocurrencies unable to accurately judge the trend of the crypto market and thus make irrational behaviors. Both Increase or decrease on interest rate have a big impact on the market.

Looking back at the whole process of the Federal Reserve in 2022, the speed and magnitude are breathtaking. This is the eighth consecutive interest rate increase since the Fed started its current interest rate increase cycle in March last year, with a cumulative interest rate increase of 450 basis points. After this interest rate increase, the US benchmark interest rate has once again set a new peak since the 2008 financial crisis. The range and speed of this interest rate increase can be said to be among the best in the 50 years since the collapse of the Bretton Woods system.

Therefore, in 2022, the entire crypto asset market is in a very low performance and in a bear market state, which is also greatly affected by the Federal Reserve.

The 25 basis points this time will also be the smallest interest rate increase since the Fed started the interest rate cycle in March 2022.

At the same time, this also means that the Fed’s financial policy in 2023 has a tendency to tighten, and even do not rule out the possibility of turning to rate cuts.

As mentioned earlier, the rate hike is a very obvious “bearish” signal for the financial sector, so the rate cut is naturally a “positive” category for the financial sector.

So, 2023, the Federal Reserve will turn to cut interest rates?
Presently, the mainstream voice of the market is that the Fed will not cut interest rates this year, because until the end of 2023, the inflation rate may be much higher than the Fed’s 2% target.

But a flashback at the easing cycles since the early 1990s will show that the Fed has never hesitated to ease monetary policy even when inflation was above target.

The three most aggressive easing cycles (1990–1992, 2001, 2007–2008) all began with inflation, even core inflation, above 2%. Core inflation is usually lower and less volatile than headline inflation.

From a macro perspective, a review of the Fed’s economic policy over three decades reveals that the forecast that the Fed will cut interest rates by as much as 0.5 percentage points from the top rate reached mid-year later in 2023 is a view that is very much in line with the Fed’s cyclical policy and, at the same time, coincides with global expectations in the global interest rate futures market.

As for the Fed officials’ insistence that policy easing is unlikely in 2023, I would like to borrow a very popular slogan from the U.S. financial community: “You should watch what the Fed does, not what it says.”

Will interest rates rise to a certain level and then stay put, or will they turn to interest rate cuts? The specific still depends on the data this year, after all, data is king.

In Summary
Although the Fed’s interest rate hike is bad news for the cryptocurrency field, it will also be the smallest rate hike since the Fed started the rate hike cycle in March 2022. This is also very likely to be the starting point for loosening monetary policy. For the cryptocurrency in 2023, this will be a very big “good news”, and I look forward to the performance of the cryptocurrency market this year.

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