What is the Fed Rate?
Fed rates, also known as federal funds rate, refers to the target interest rate regulated by the Federal Open Market Committee (FOMC) to modulate economic activity. The target is also the rate at which commercial banks borrow and lend their excess reserves to one another overnight. Target fed rates are often adjusted eight times a year, when the FOMC meets to recalibrate their monetary policies.
Source from: Investopedia – Federal Funds Rate: What It Is, How It’s Determined, and Why It’s Important
How are Fed Rates Determined?
Fed rates are influenced by economic indicators, such as the core inflation rate and the durable goods orders reports, which indicates the economic health of the nation.
During the COVID-19 pandemic, the Federal Reserve (Fed) eased monetary policies through the reduction of the fed rates, thus lowering the cost to borrow between banks. This strategy was aimed at supporting spending to stimulate the economy by lowering the cost of borrowing for households and businesses.
However, as restrictions were eased and inflation rose, the Fed began increasing rates to bring price growth under control. In 2022, the Fed raised interest rates half a point to the highest level in 15 years. Theoretically, the increase in cost to borrow through rate hikes will result in decrease in consumption and demand, causing the fall in the prices of goods and services, therefore curbing inflation.
How does Fed Rate affect Crypto?
While cryptocurrencies are considered to be decentralised without intermediary interventions, the strength of the currencies have consistently been proven to be largely affected by adjustments in Fed rates.
Rate hikes are often likely to result in investors’ withdrawals from the market in response to rising interest rates, surging inflation and a potential recession. Higher interest rates also typically suggest a smaller risk appetite for high-risk/high-return assets such as cryptocurrencies, thus further affirming the decline in prices.
Other Factors Affecting the Crypto Market
2022 was marked as the year of major crypto crash, with notable names such as FTX, Voyager and LUNA suffering from cataclysmic and gripping collapses. With the downfall of these crypto giants, it also brought about a wave of negativity and fear among investors, thus further dampening the already unfavourable environment.
Government regulation also plays a significant role in affecting the crypto dollar. While cryptocurrency is regarded as a decentralised currency, legislative bodies possess the power to ban or recognise the use of crypto as legal tender. When China pursued a harsh crackdown on crypto last year, it sent Bitcoin dropping as much as 5.5%, proving that crypto is not so unfaltering after all.
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