Crypto Market Reacts to Long-Awaited FED Interest Rate Decision
Cryptocurrency has long been heralded as an inflation hedge that is uncorrelated with the stock market. This is true in a sense – protracted downturns in traditional assets have been during crypto bull runs, and vice versa. But the crypto market is still very young (and much smaller than big stock exchanges) and is beholden to the whims of the macroeconomic environment. Therefore, news regarding the federal cash rate – especially in the United States – can have a massive impact on the short-term price of digital currencies.
Inflation Cools, But Rates Remain High
After a post-COVID world saw inflation run rampant amid supply chain struggles, governments around the world steadily raised interest rates to cool off the economy. Basically, increasing the cash rate makes money more expensive – it’s harder for people and businesses to borrow – and incentivises saving. The intention is to slow spending, and in turn, slow inflation. While this helps prevent the cost of living from running out of control, less spending and high interest from banks makes many investors steer clear of risky assets like Bitcoin.
Many in the financial world are anticipating interest rates to finally come down over the next year, as inflation issues are mostly tackled and the economy appears ready to recover from global lockdowns. However, it appears the U.S. Government aren’t willing to take that first step yet, with the federal government deciding to hold the interest rate steady at 5.25-5.5% – the highest since the early 2000s.
Market Down Across the Board, But Pessimism to be Short-Lived
The crypto market wasn’t happy with the Fed’s trepidation to reduce rates, with Bitcoin falling 1.3% over the past day and the rest of the top coins following suit. Yet, while interest rate decisions can have a visceral effect on the crypto market, its influence is often short-term – especially considering that this decision was ultimately expected, if a little disappointing for some.
The Federal Reserve has predicted three interest rate cuts coming in 2024. This will keep rates relatively high, but signals the beginning of a potential turnaround for tech stocks and cryptocurrency, sectors that thrive during low-rate environments. Just how impactful these macroeconomic factors are in light of major events like the Bitcoin halving and further ETF approvals will be an interesting wait-and-see for the community.