The United States Federal Reserve (The Fed) or the central bank that pulls the levers of the American economy—released its June rate hike, signaling to the American populous that the economy must cool down to bring inflation back down. The Fed raised interest rates by a robust 75 basis points (0.75%), the highest rate hike since 1994.
The crypto market and stock market both reacted favorably to the news from The Fed—citing an increase in interest rates would hopefully bring down the price of consumer goods and overall business expenses.
In an official statement from the Fed, Jerome Powell, Chairman of the central bank said,
“The Committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate,”
What does this ultimately mean for the crypto market as a whole? Will we see these interest rates rise again or will this be the cooling we needed to curb inflation?
Diving Into Inflation
To see how inflation and interest rates relate to one another, we first need to understand what inflation exactly is and why it occurs. In layman’s terms, inflation is the general increase of consumer goods (think: bread, milk, oil, clothes) and the fall in the purchasing value of money.
What that means is that the same loaf of bread you bought one year ago, now costs roughly 8% (the rate of inflation as of the time of writing) more today. The same principle applies across the board to all consumer goods, from clothes to gasoline.
Now, why does this happen?
Well, it happens primarily because the economy is doing so well. People have money, they’re spending it, causing businesses to boom and subsequently increase their spending by hiring more employees and expanding their businesses. All in all, this upward trajectory is good for a growing economy,—but if not kept under control it can lead to inflation.
How Does This Affect Me?
As you might expect, inflation affects all financial instruments in the economy. This happens because when the Chairman of The Fed raises interest rates, what he is doing is raising how much it costs to borrow money from banks and in particular the central bank.
Commercial banks, like Chase or Bank of America, now have to pay a higher amount to borrow from the central bank, which means they end up raising the interest rates on their customers. That is why you will often see an increase in your mortgage or credit card bill when The Fed raises interest rates. It is a trickle-down effect that affects everyone from the very top, down to the working class.
Inflation and Crypto
Higher interest rates affect not only the average consumer but retail investors as well, including the majority of the crypto market who rely heavily on retail investors. With higher interest rates coming from The Fed, the cost of borrowing is increased and so too are the price of fees for trades. This ultimately means less available cash for crypto retail investors, which is where we find ourselves now.
With an embattled crypto market suffering, not only because of projects flinging like that of Terra/Luna but because there is simply less cash available to be used in highly volatile markets like that of the crypto and NFT markets.
Will this market cooling last? Analysts are predicting that The Fed may indeed bring us into a recession this year as Fed Chairman Jerome Powell hints at another 0.75% rate hike later this year.
Dear reader, prepare for a recession and know that it is coming. It won’t be the end of the earth, just another financial cycle that we have to get through. It won’t be the first crypto winter that we have endured and it certainly won’t be our last. Remember that even the greatest oaks emerge from the harshest of winters. Keep hope, Crypto Spring will come after this winter.