Economy 101: What happens when the Federal Reserve raises the interest rates and how it can affect the Crypto markets
The interest rates established represent the cost of money with which individual American banks borrow money from the Fed. The banks use this liquidity to provide loans to their customers (the young couple who want to access a mortgage to buy a house, the craftsman who needs a loan to buy new machinery for his business, etc …).
The higher the interest rates, the higher the cost of loans provided to customers. On the contrary, if the interest rates are lower, the cost of financing is lower and therefore convenient. This pushes businesses and households more to ask for investments and to get into debt. This triggers a very high demand for raw materials, goods and services (especially after the restart of the economy after the Covid-19 pandemic). When demand exceeds supply prices begin to rise and this imbalance increases inflation. The annual inflation rate for the United States is 9.1% for the 12 months ended June 2022, the largest annual increase since November 1981. Here the Fed intervenes. Raising interest rates discourages the provision of new loans because they become more expensive, the demand for goods and services falls, the currency in circulation falls and inflation tends to fall. On the other hand, however, this could further increase the public debt (which to date in the United States alone has exceeded $ 30 trillion) and lead to an economic recession.
What could happen to the cryptocurrency market?
As the Federal Reserve feared to start raising interest rates in November 2021, the price of Bitcoin (BTC) has fallen.
Usually in moments of fear, people tend to accumulate liquidity and sell the assets they hold (including BTC and other Cryptocurrencies). This could trigger a sharp drop in prices in the Cryptocurrency market. There are also other factors:
- an uncertain winter on the energy front;
- the conflict in Ukraine that does not tend to subside and which involves a difficult supply of raw materials;
- the Covid-19 pandemic not yet completely overcome with lockdowns in some key countries of the world (such as China);
- mood of uncertainty globally.
All this could have a negative impact on traditional financial markets and therefore also on Cryptocurrencies. As for Bitcoin, however, its scarcity could protect its value during times of rising inflation.
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