Inflation is rapidly on the rise. And in an attempt to combat this menace, the United States Federal Reserve announced a 0.5 per cent hike in interest rates, the highest hike ever in interest rates in the last two decades.
Interest rates go up!
The US Federal Reserve announced late at night on Wednesday that it is raising short-term interest rates by 0.5 per cent, marking the largest increase in rates since the year 2000. Interestingly, the very first hike in interest rates since 2018 occurred in March, when the rate was raised by 0.25 per cent.
Why did the FED increase the interest rates?
Under its contractionary monetary policy efforts, the US FED is trying to fight inflation by raising short term interest rates. The US FED is trying to decrease spending in the US economy.
As a result of the FED's decision, the demand for products and services is expected to decrease. Borrowing money for new purchases will become more difficult as interest rates rise, that way people will not be able to spend as much due to a liquidity crunch.
How has this impacted the crypto markets in the past?
Although, the recent hike was welcomed by the crypto markets with the global market cap zooming over 5 per cent and cryptocurrencies like Bitcoin, Ether, Cardano, Ripple, etc all witnessing spikes, in the long run, as per historical data, it seems like the reduction in spending also causes a reduction in investing. As per data from CoinMarketCap, ever since the US FED began raising interest rates, the price of Bitcoin has fallen by 40 per cent.
Sharat Chandra, a crypto expert and vice president of research and strategy at EarthID, sees the fact that the US FED won't consider larger rate hikes as a comforting factor for the markets.
He sees the recent rate hike as a positive cue for the crypto markets, at least in the short term.
He told Business Today, "Historically the month of May has been a strong month for crypto assets. Recently, US FED Chairman Jerome Powell described the US economy as strong and ruled out larger rate hikes. According to the US Bureau of Labor Statistics, the unemployment rate fell to 3.6 per cent in March. Employment numbers do support the case for a strong US economy. Moreover, the crypto markets already factored in the rate hike. These factors have cumulatively buoyed the equity as well as crypto markets."
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