As with every meeting with the central bank of the United States, The Fed, all eyes were on Chairman Jerome Powell again this week as markets awaited the much-anticipated news of raising interest rates (again, no surprise there).
So let’s talk about interest rates and what they mean to crypto and the larger markets as a whole. Let’s back up and let me explain why raising interest rates is even a needed economic tool when it comes to reigning in the global economy from the seats of Washington.
What Exactly is Inflation?
Inflation is when prices for stuff go up over time. High inflation can make it hard for people to buy things, and businesses might struggle to keep their costs under control.
The Fed is the big boss when it comes to controlling inflation in the US, making sure the economy stays stable. One of the Fed’s main tools for controlling inflation is raising interest rates.
When they hike up interest rates, it becomes more expensive to borrow money, which means people and businesses spend less. This can help reduce inflation because it cools down demand for goods and services.
The Fed’s decision to raise interest rates recently was influenced by how the US economy is doing. The economy has been growing steadily for a while now, and unemployment is super low—the lowest it’s been since 1969.
That means more people are buying things, and prices are going up. The Fed wants to stop inflation from getting too high, which could mess up the economy in the long run.
Is Powell Considering the Downside?
But there are some downsides to raising interest rates, too.
For one, it might be harder for businesses to borrow money for new projects and growth. This could slow down the economy over time. And if you’re already struggling to pay back debt, rising interest rates could make things even more expensive for you.
The Fed is taking things slow and being cautious about raising interest rates. The 0.25% increase is small, and they’re keeping an eye on the US economy and inflation to decide if they need to raise rates more in the future.
They’re also planning to gradually reduce their stash of assets, which they got during the economic crisis. This could have the same effect as raising interest rates because it’d take some cash out of circulation.
People in the finance world are cool with the Fed’s decision to raise rates. Investors get why inflation needs to be kept in check, and the Fed has a clear plan for how to do it.
But there are some worries about how raising rates might affect countries that are still developing and the global economy. When the US raises interest rates, it looks more attractive for investors to put their money in the US.
That can weaken other countries’ currencies, especially if they’re still developing. And countries that borrowed money in US dollars could have trouble paying back their debt if interest rates go up too much.
How Has Crypto Done Since the Rate Increase?
As for crypto, the market’s been taking a dive since the Fed announced the rate increase. We’ll have to wait and see if this is just a normal correction or if it’s the end of the bear market.
Despite the focus on the banking crisis, the Fed also revised its estimates for GDP in 2023 and 2024 slightly downward. The unemployment rate, on the other hand, is expected to be 4.5% this year. In general, the Fed believes that the road to a soft landing for the economy still exists and needs to be found.
The banking crisis has brought to light some shortcomings in the supervision of the US banking system. And maybe this is all for the greater good of the entire global economy.
We have to trust that the man in the Fed’s Chair knows a thing or two that we mere mortals do not.