The Federal Reserve Board on the news of this week announced that it is going to maintain interest rates at their present level. The central bank of the US, called the Fed, manages monetary policy and decisions made by it may have a big impact on the economy or financial markets like cryptocurrencies.
On Wednesday, the Fed surprised everybody when it refrained from cutting interest rates this month. This was despite a lot of pressure from politicians and recent rate cuts by other central banks such as the Bank of Canada and the European Central Bank. While job growth and economic expansion are strong, inflation is still not where they want it to be. They target an inflation rate of 2%, but recent figures slightly rose above that mark. It means the cost of living is still rising only not at the previous high pace.
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I think this decision is very significant for several reasons. First of all, it demonstrates the Fed’s readiness to fight inflation at all costs, thus welcoming criticism. Inflation has been a matter of great concern for many people with prices of such things as housing, medical care, and education going up. By not slashing rates, the central bank is clearly showing its strong commitment to taming inflation. The reason why this is important is because high inflation can erode the value of money meaning that everything becomes expensive over time.
Now let’s talk about what it means for Bitcoin in particular. Bitcoin had an interesting reaction to the Fed’s announcement on rates. When the latest inflation numbers were released, Bitcoin initially rose by approximately 3%. But when the Fed confirmed no rate cuts were coming downpipes bitcoin price fell a little bit. This kind of reaction is not new since when interest rates are low or believed to remain low, borrowing becomes cheaper thereby increasing optimism amongst buyers in cryptocurrencies and stocks who are allowed more capital to be utilized through loans taken from the market, but if interest rates are high already or could increase further then there will be more costly borrowing which in turn discourages investing in something like Bitcoin.
However, I see a silver lining here for supporters of Bitcoin. This decision from the Fed reflects its commitment to its long-term stability rather than chasing short-term gains. As such, this could create greater faith in the overall economy which is something that benefits all forms of investments like Bitcoin. Furthermore, Bitcoin has often been viewed as a hedge against inflation. If so, and should there be a concern of increasing inflation, more people might opt to use Bitcoin as a store of value.
Another point to consider is the global context. Central banks from other large economies have already begun reducing their interest rates. This may provide contrasting incentives for international investors. Consequently, while the Federal Reserve stays put, lower rates elsewhere could force traders to seek out profits in different markets including cryptosystems. These divergent policies might add some volatility in short time frames but at the same time show the possibilities of Bitcoin as a worldwide asset that is not tied down by any one country’s monetary policy alone.
Besides, it is important to note that the Federal Reserve is also subject to political pressure. Elizabeth Warren, a US Senator hinted the US Federal Reserve to decrease interest rates to ensure housing and other related costs are affordable. This kind of pressure makes it clear how different groups suffer from the policies of the Fed. While lower rates might make borrowing cheaper and help with costs in the short term, they could also lead to higher inflation down the line, which brings us back to the Fed’s dilemma.
Posted Using InLeo Alpha