Digital coins have undoubtedly become a significant player in the global financial system, embraced by major corporations, private investors, governments, and financial institutions. These stakeholders now formulate their crypto strategies based on the latest interest rate adjustments announced by the US Federal Reserve (FED), the central financial authority of the US government.
The FED plays a pivotal role in setting economic policies and regulations that impact both the US market and the international business landscape. It’s crucial to comprehend how the FED manages interest rate changes, as these adjustments can trigger substantial strategic shifts in the crypto sphere.
Understanding Interest Rates
The interest rate mechanism deployed by the FED is one of the most potent tools in the global financial landscape. Interest rates have the power to influence business growth, employment rates, international expansions, and short- and long-term investment strategies for businesses of all sizes.
Consequently, the FED owns a tool that can significantly influence an entire economy within a relatively short span. When interest rates are low, the economy prospers and expands. Businesses become more aggressive in their strategies, expanding rapidly and broadening their operational horizons.
The FED considers numerous factors when determining official interest rates, striving to set the right figures to prevent both recession and inflation. In essence, the FED’s mission is to strike a balance, avoiding economic downturns while averting currency inflations.
How Does the FED Decide to Raise Interest Rates?
Balancing interest rates is a delicate endeavor, far from being precise, given the unpredictable nature of the free market’s economic movements. Generally, the FED aims to steer the economy toward sustainable growth. Lower interest rates encourage individuals and businesses to take on more debt as it becomes more manageable. Increased borrowing leads to higher demand for almost every product or service in the market.
People buy more cars, houses, and luxury items, while businesses expand their workforce and open new manufacturing facilities. This growth in demand and supply metrics results in a substantial boost. However, there have been instances where excessive demand has led to bubbles that can burst, causing recessions. Therefore, the FED strives to maintain equilibrium by adjusting interest rates as needed to promote growth while preventing overstimulation.
Can Rising Interest Rates Benefit Crypto Traders?
Historically, rising interest rates have typically been unfavorable for the crypto sector. There’s a strong correlation between interest rate hikes and reduced trading activity in flagship cryptocurrencies like Bitcoin. When the FED increases interest rates, the crypto market becomes more conservative as participants allocate funds for other investment opportunities.
However, recent developments have uncovered a new strategy in the market. Higher interest rates often indicate potential inflation in traditional currencies due to excessive market demand. While monetary and fiscal policies can manage inflation, the extent of value decline remains uncertain.
As a result, many investors and traders are choosing to convert their fiat currency into cryptocurrencies, selling high and holding crypto assets until the inflationary cycle subsides. While this approach appears dominant, there’s a mixed public sentiment, as cryptocurrencies inherently carry risks, including liquidity and volatility concerns.
The Potential Future of High-Interest Rate Markets
The past few years have been challenging for crypto markets, but 2024 holds promise. In the 2020-2021 period, the FED maintained near-zero interest rates to aid economic recovery following the COVID-19 pandemic. The 2022-2023 period witnessed significant inflation due to an unexpected surge in remote work and other factors. Inflationary trends are subsiding, and the FED is signaling future interest rate cuts to stimulate growth. Even if the public doesn’t fully accept crypto as an alternative to high-interest fiat investments, 2024 is poised to boost cryptocurrencies back to their former popularity.
In summary, high-interest rates set by the FED often have a negative impact on the crypto landscape. Nevertheless, in some cases, the public has chosen to convert their fiat funds into crypto to offset inflationary losses. Generally, cryptocurrencies stand to benefit from lower interest rates as investors become more inclined to invest in riskier assets.