Allinstation 
For many people who have participated in the crypto market, following the decisions of the FED is very important.
However, there are also those who do not fully understand this organization.
Therefore, in this article, let’s explore with Allinstation what the FED is and how its decisions affect the crypto market.
What is the FED?
The FED (Federal Reserve System or the Federal Reserve) is the central bank of the United States and is considered the most powerful financial institution in the world.
The organization was established to provide the country with a safe, flexible, and stable monetary financial system.
The FED is privileged to control the production and distribution of money and credit for the nation.
Along with that, the FED is also responsible for formulating monetary policy and regulating member banks.
The current chairman of the FED is Mr. Jerome Powell.
The Mission of the FED
The main goal of the FED’s policies is to create an economy with stable prices (inflation rate within permissible limits) and maximum employment levels.
The FED’s missions can be further classified into four general areas:
- Implementing national monetary policy by influencing monetary and credit indicators in the U.S. economy to ensure maximum employment, stable prices, and moderate long-term interest rates.
- Supervising and regulating banking institutions to ensure the safety of the U.S. banking financial system and protect consumers’ credit rights.
- Maintaining the stability of the financial system and addressing systemic risks.
- Providing financial services, including a core role in operating the national payment system, depository institutions, the U.S. government, and foreign official institutions.
Why FED’s Decisions Impact the Global Economy
All of the FED’s activities are closely watched worldwide.
The reason for this is that the USD is the key currency in international trade activities.
Besides, the USD also holds an important position in the international monetary system.
Therefore, important commodities like gold and oil are priced in USD.
Meanwhile, the FED is the only organization that can decide the increase or decrease of USD interest rates. From there, the FED can establish the value of the USD through buying and selling USD and other foreign currencies.
This directly impacts the strength of the USD, affecting the global economy.
Among the FED’s actions, the most notable is the decision on interest rates. So what is it?
Understanding the FED’s Federal Funds Rate
What is the FED Rate?
The Fed rate (Federal Funds Rate – FFR) is decided by the Federal Open Market Committee (FOMC), an agency under the FED.
This is the interest rate at which banks lend to each other for one day or overnight.
According to regulations, each commercial bank must maintain a required reserve ratio in its Central Bank account.
Banks with a reserve ratio below the FED’s required reserve must borrow more money to supplement.
Meanwhile, when the ratio exceeds the requirement, banks can lend to other banks.
Besides, the FED rate is also a tool used to control the growth rate of the U.S. economy.
At the same time, it also significantly impacts other financial costs, including:
- Prime rate.
- Deposit interest rate.
- Loan interest rate.
- Credit card interest rate.
- Adjustable mortgage rate.
Therefore, any change in the FED rate can cause significant fluctuations in the financial market, especially the USD.
Thus, the main goal when the FED uses this tool is to control inflation, reduce unemployment, and ensure stable economic growth.
The FOMC usually meets and decides on the FED rate 8 times a year.
How FED’s Interest Rate Decisions Affect Markets
So how do FED’s interest rate decisions affect traditional markets like stocks, bonds, and the crypto sector?
Stock and Bond Markets
In general, when the FED raises interest rates combined with tightening liquidity, it means borrowing costs will be higher.
If the economy has not really improved at that time, this will be negative for businesses.
They will have to borrow at higher costs, thereby reducing profits. This will cause some companies to face financial difficulties.
At that time, the stock market and possibly bonds will be negatively affected.
However, conversely, if the FED lowers interest rates, the amount of money supplied to the market will increase. This means borrowing costs will decrease.
This will help boost economic development. Especially for businesses, they will have the opportunity to borrow capital at lower costs. From there, they can develop faster with greater profits.
Along with that, although not directly impacting, consumer borrowing costs will also decrease. This helps stimulate consumer demand in society.
Additionally, injecting money into the economy will give more people more cash. From there, idle cash will be generated, and the assets many investors choose to invest in will be stocks and bonds.
All of the above will generally be positive for these markets.
Crypto Market
Recently, the correlation between crypto and the U.S. stock market has been increasing.
This means that the reaction of crypto to the FED’s decisions will be similar to the stock market.
Specifically, when the FED lowers interest rates and injects money into the economy, crypto may become an attractive asset to attract investors’ money.
The opposite can also happen to this market.
However, there have been analyses suggesting that the impact of raising interest rates on BTC is only short-term and may even be beneficial for BTC.
The reason for this may be that BTC has a limited supply and is increasingly being widely accepted.
The Impact of FED’s Interest Rate Decisions on BTC Price in the Past
Let’s look from the beginning of the year to see how the FED’s interest rate decisions have affected BTC prices.
Specifically, on January 26, the FED decided to keep the interest rate at 0.15%. This news initially caused BTC to rise slightly in the first 30 minutes.
However, after that, BTC’s price dropped sharply from over 38,000 USD to 35,850 USD.
In the following days, BTC’s price rose back to 41,500 USD.
Next, on March 16, the FED raised the interest rate from 0.15% to 0.4%. As the market seemed to have anticipated this, BTC’s price initially dropped but increased in the following days.
Most recently, on May 4, the FED raised the interest rate to 0.9%, a stronger increase than many expected.
This may be part of the reason why BTC’s price rose initially but dropped sharply in the following days.
From the above data, you can see the mixed reactions of BTC prices to the FED’s interest rate decisions.
This shows that to predict BTC price trends, investors must consider other factors besides the FED rate.
Conclusion
Allinstation has provided you with information about the FED and how its decisions affect the crypto market.
I hope after this article, you will have more knowledge to equip yourself for your crypto investment journey.
Let’s explore and evaluate projects to make the most informed investment decisions. Good luck!!!
Join our information channels to discuss and keep up with the latest market developments!
