The Federal Reserve’s strategy of raising interest rates could continue, making it harder for the crypto industry to bounce back. For crypto assets to be a hedge against inflation, the industry needs to find ways to decouple crypto from traditional markets. Decentralized Finance (DeFi) Perhaps breaking away from traditional financial models could provide a solution.
The Impact of Federal Reserve Policy on Cryptocurrencies
In the 1980s, Federal Reserve Chairman Paul Volcker introduced a policy of raising interest rates to curb inflation. Volcker raised interest rates above his 20%, lowering people’s purchasing power and sending the economy into recession. The strategy worked and the consumer price index (CPI) dropped from 14.85% for him to 2.5% for him. Today, the Federal Reserve still uses the same methodology to bring down high inflation.
In 2022, US core inflation will hit a 40-year high, and the Federal Reserve has consistently raised interest rates throughout the year. This has had a negative impact on the crypto market. Mike McGlone, senior commodity strategist at Bloomberg Intelligence, explained that the Fed’s “sledgehammer” is “putting pressure on cryptocurrencies this year.” McGlone believes Fed policy could lead to a worse crash than the 2008 financial crisis.
Market data show a clear pattern in which Federal Reserve rate hikes are matched by significant declines in cryptocurrency prices. For example, Bitcoin (Bitcoin) Prices fell on May 6 after the Fed’s meetings on May 3 and 4 to raise interest rates by 0.5%. Similarly, after his Fed meetings on June 14th and 15th, Bitcoin fell to his $17,500, where interest rates were raised by him by 0.75%.
The rate hike in June was a significant factor for cryptocurrencies such as BTC and Ether (ethereum) down 70% from its all-time high. As the price chart shows, Federal Reserve policy is directly correlated with crypto market volatility. This uncertainty is preventing the cryptocurrency industry from making a definitive comeback. As cryptocurrencies are a risky asset class, investors are reducing their exposure to cryptocurrencies due to concerns about rising interest rates and a recession.
The Fed hiked rates by another 0.75% in November.The Federal Reserve said it was trying to beat 2% inflation in the long run. The Federal Reserve will continue to raise the Federal Funds Rate to 3-4%. It “expects continued increases in the target range to be appropriate to achieve a sufficiently restrictive monetary policy stance to bring inflation back to 2% over time.”
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With inflation remaining high, there is no reason to believe the Federal Reserve will stop raising interest rates any time soon. Unfortunately, this is not good news for risky assets like cryptocurrencies.
Future trajectory of Fed policy
Most likely, the Fed will continue to raise rates according to market data feedback. Bank of America wrote: “The Fed will emphasize its reliance on data […] Before that, get two more NFP and CPI prints. [December] Meeting; if the heat is still there, you might have another 75 bps on the card, and slow down to 50 bps if you don’t. The strategist added, “The Fed rate hikes are not over until the data show.”
Reflecting this sentiment, Barclays’ credit research team said, “The Fed needs to see a turn in inflation before it turns into a meaningful dovish trend.” Therefore, even if the Federal Reserve cuts its rate of hikes, it is likely that it will continue to raise rates. Depending on inflation, the Fed may slow down its liquidity-tightening measures from December, but won’t stop its inflation-mitigating strategy anytime soon. Investors should therefore be prepared for prolonged volatility in the cryptocurrency market.
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The Federal Reserve intends to create a reverse wealth effect so that investors can revalue their cryptocurrency portfolios. They hope to create volatile market conditions by slowing demand, but are also cautious to avoid disruption. First, the Fed is diligent in evaluating and enforcing its pathetic policies. Therefore, the cryptocurrency industry needs to find alternative ways to tackle the Fed’s challenges.
The current market scenario shows that cryptocurrency prices are intertwined with equities and the stock market. Investors still see them as risky assets and are skeptical of investing during periods of high inflation. It is therefore imperative that the crypto sector distances itself from other traditional riskier asset classes. Fortunately, a report from the US Central Bank suggests that risk perceptions towards cryptocurrencies are gradually changing.
Cryptocurrencies are no longer in the top 10, according to a report by the Federal Reserve Bank of New York. Quote As a potential risk to the US economy. This reveals a significant shift in investor mindset and shows that cryptocurrencies will eventually become a risk-free asset class. But that won’t happen if cryptocurrencies continue traditional financial models. To beat inflation and offset Fed policy, the crypto industry must embrace decentralized finance for a robust future economy.
Bernd Stockl Co-Founder and Chief Product Officer of Palmswap, a decentralized perpetual contract trading protocol.
This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.
