How Fed Rate Hike Could Affect Crypto Prices

Popularly called the Fed, the Federal Reserve is responsible for stabilizing the economy.

Their roles specify the interest rate concerning all borrowings, lending, and deposits.

The coronavirus pandemic came unannounced, and the Feds had to introduce several measures to cushion its effect.

The pandemic caused inflation to the tune of 8.5%, and the Feds are trying to control it by increasing interest rates.

The Feds announced an increase of 0.5% to the interest rate.

The hike in the Fed rate is expected to affect crypto prices and the crypto market at large.

The interest rate increase is the highest since 2000, and the cryptocurrencies will respond with a bearish movement.

Another effect is that those who invested in crypto as an edge against inflation will bear greater losses.

To cushion the effects of the covid 19 pandemic, the federal reserve system (feds) kept the interest rates low throughout the first two pandemic years.This decision received wide applause across all quarters.

Image: The Balance

By May 4, 2022, the Federal Reserve announced a hike in the fed rate; the hike will see an increase in the fed rate by one-half (0.50%) of a percentage point.

Shortly after, it was announced that another increment in the Fed rate would be the second hike this year. This hike will increase the fed rate by one-quarter of a percentage point. The new Fed rate hike will take effect by March 16.

With these two new Fed rate hike increases, experts opine that plans are underway to launch additional Fed rate increases before the year ends.

Therefore, it is important to understand the rationale behind the hike in interest rate, its effect on the crypto market, crypto prices, and the economy at large.

What Is The Fed Rate?

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The Federal Reserve System (Fed) is saddled with keeping a stable economy, and its role is to raise and lower interest rates.

The Fed rate is the amount which the Fed pegs the interest rate, and it is the amount of interest due for a borrowed, lent, or deposited fund.
One major event that tested the responsiveness of the Feds was the pandemic. The Feds responded by introducing various measures to ensure the economy was stable.

One of those measures to control the economy is increasing and decreasing the interest rate. At this point, the Feds want to increase the interest rate.

Inflation is estimated to be at 8.5%, and it keeps increasing. The Feds want to control it as soon as possible to ensure the inflation rate takes a halt and gets reduced.

There are two ways the Feds intend to control inflation. The first one is to increase the interest rates.

The rising fed rates will make it more expensive to take loans and borrow money. By increasing the interest rates, the Feds will be able to slow down spending without triggering a recession.

The second measure is to cut down inflation without inflicting significant economic pain. This measure will see the selling off of bonds to reduce its $9 trillion balance sheet.

There will be less money in circulation by selling off excess bonds and will eventually get inflation under control. However, the effect of this second measure is that it will reduce the demand for crypto assets.

Since the increase in the interest rate by the Feds is to control inflation, it is expected that the fed rate hike will affect the crypto prices.
At this juncture, we shall examine the various ways in which the hike will affect crypto prices.

The Effects Of Fed Rate Hike On Crypto

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The increase in the federal reserve's benchmark rate, directly and indirectly, affects everybody. The effect ranges from the credit card in your wallet to the student loans that keep piling up.

We shall examine the effect on the crypto market and prices in this context.

• The May Fed rate increase is the highest in decades. Experts expect Bitcoin and other major cryptocurrencies to respond with a bearish movement.
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• Most experts and stakeholders believe that the aggressive rate hike is not good for crypto prices and investors. The indications that the interest rate increase might continue makes the situation worse.
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• Due to the high increase in Fed rates, people are pulling out of the high-risk and volatile digital assets. The pullout by investors keeps being an issue for the crypto market. Since the beginning of this year, crypto has struggled to gain momentum.
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• Another effect of the hike in the Fed rate is that those who bought crypto assets with the view that it is an edge against inflation are currently bearing the brunt.
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• In recent times, the cryptocurrency has been witnessing an increase and decrease in price, just like equities and tech stocks, and at the moment, they are all floundering due to the 0.50% increase in Fed’s rate.

Conclusion

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The decision to raise the key interest rate by the Federal reserve to 0.50% is the biggest increase since the year 2000. The fact that analysts expect the jump in the rate to be continuous makes the situation scary.

The effect of these increases cuts across all facets of the economy. While everyone will continue to calculate their impact, this article looks at the impact on the crypto prices and the market.

When the last increase in the Fed rate occurred, the cryptocurrency was not in existence, so it isn't easy to compare that period and events to what is expected to happen in 2022.



Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
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