The Fed is one of the most powerful agencies in the world with a monetary policy instrument to regulate financial markets not only in the United States but globally. Therefore, from a macro perspective, the Fed’s basic interest rate has a strong impact on the whole Cryptocurrency market
What is FED Funds Rate?
The federal (fed) funds rate is the rate at which banks lend to each other for a period of one day (or overnight loans) to get the required amount. reserve requirement of the Fed.
However, the Fed rate is also a tool used to control the growth of the US economy and is the benchmark for interest rates on credit cards, mortgages or loans, and more. This is the base interest rate at which any change in the Fed rate can cause significant fluctuations in financial markets, especially the US dollar.
In addition, the Fed’s interest rate is a tool to control economic and financial growth in the United States, and it is also the standard for interest rates on credit card loans, bank mortgages, or loans. loans from state banks and many others. other.
U.S Inflation Rate And The Fed’s Plan
Since the beginning of 2020, inflation has increased strongly and continuously from near 0% to 8.6% (May 2022). This is also the highest increase in inflation since the beginning of the 21st century.
The reason for the increase in inflation comes from the COVID-19 epidemic and the congested supply chain from China as they follow the Zero-Covid strategy in disease prevention, at least until the end of 2022, after the period points at the Chinese Party Congress to defend their record in leadership.
The Fed’s Plan
Currently, the response of the Fed in curbing inflation is to increase the funds rate to withdraw cash “printed” during the COVID-19 period, also known as Quantitative Tightening -QT. The balance sheet that the FED is shrinking has grown to $9 trillion during COVID. The obvious effect of this shrinking balance sheet, or QT, is to create a ticking time bomb in the system, which drains the system’s short-term funding liquidity, pushing up short-term interest rates.
The Fed’s rate hike is expected to last until the end of 2022, in my opinion there will be some impacts as follows:
- Fed raises interest rates + QT will push short-term USD interest rates up
- Dollar strengthens
- Rising commodity prices push inflation
- Central banks of other countries will be dragged by the Fed to tighten monetary policy
- Fiscal support packages are somewhat narrower than expected
Impact on Crypto Market
When the Fed changes the funds rate, the behaviour of the players will also change and we have 4 short-term conclusions above. From there it will affect the financial market and the crypto market.
For the above reasons, cash is preferred by big players, as we can clearly see in the figure below, the amount of cash held by fund managers is at a record high since the 9/11 shock. However, the accumulation of cash has been done by them since Q2 2020.
With such a large amount of cash, in my opinion, they are waiting for a dip buy from the financial market, which means there will be a very strong buying force if the market declines again or the market has to maintain a cumulative range at least this year.
Some cases say that the crypto market was born during the crisis of the traditional financial market, so when the traditional financial market fell, there would be no impact on the Crypto market. This is a misconception!
Look at the change in value between Bitcoin and Nasdaq, they are going together, so the value of portfolio diversification is gone. Crypto for institutional investors now is simply a large customer like pension funds who feel they want to hold crypto, that’s all.
With the Fed’s interest rates increasing and the continuous withdrawal of money from circulation, it is clear that big players are holding a lot of cash, so there is no reason for us to disburse at this time.
The Crypto market will benefit from here as the Big players begin to diversify their portfolios, meaning they will start holding Bitcoins, Ethereum, … and the money will flow back into the market. It is still difficult to predict when the Crypto market will fall until new money flows.
Some signals in my opinion will be the time to consider disbursing into the Crypto market:
- FED plans to cut interest rates
- China opens up and supplies activities increase sharply
- Cash from fund managers began to decline.
Above are some of their analysis of how the Fed Funds Rate affects the Crypto Market, and signs to know when we are coming back to the market.
In general, until the end of the year, I still support the view that the FED will continue to control inflation to implement short-term strategies. I also provide analysis and signals so that we can grasp when to start disbursement in the market. Hope it helps readers.
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DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.