In light of Silicon Valley Bank’s bankruptcy, ensuing banking disruptions, and persistent inflation, the Federal Reserve must address some difficult questions about the future of interest rates. The Fed held off on hiking rates during its June 13–14 meeting after doing so for ten consecutive meetings. If circumstances called for it, Fed officials said they would probably start raising rates again later this year. However, some market observers believe that the Fed is getting closer to the end of hiking rates as it works to manage inflation, which fell to 4% in May from a year earlier. Over the past year and more, higher rates have been reflected in stock prices, cryptocurrency prices, and the prices of commodities like oil. But what can investors anticipate going forward, and how long will the impact of the rate environment last?
What is the Federal Reserve?
The United States’ central banking system is known as the Federal Reserve System (often abbreviated as the Fed or just the Fed). The Federal Reserve Board (FRB), a board of governors that is selected by the president, oversees it. Privately-owned commercial banks are governed and supervised by twelve regional Federal Reserve Banks, which are dispersed across the country’s cities. Commercial banks with national charters are required to own stock in the local Federal Reserve Bank and have some board member elections. Addressing banking panics was the Federal Reserve System’s principal stated purpose for existence.
The Federal Open Market Committee, or FOMC, which is in charge of formulating Fed policy, has a «dual mandate» that includes:
- Maximum employment: Over the long term, the Fed aims to maintain the economy’s employment level as high as is sustainably practicable.
- Price stability: The Federal Reserve works to maintain inflation, as shown by annual fluctuations in the PCE (Personal Consumption Expenditures Price Index) and CPI (Consumer Price Index) at a steady and low target rate of 2% over the long term.
In short, the Fed must foster a transparent climate in which prices remain stable and new jobs can be produced. To that aim, it examines economic risks and makes regular changes to monetary policy.
An important tool applied by Fed for monetary policy: Interest Rates
The interest rate is the amount charged by a lender to a borrower and is expressed as a percentage of the principal—the amount loaned. The annual percentage rate (APR) is the term used to describe the interest rate on a loan. An interest rate can also be used to the amount earned from a savings account or certificate of deposit (CD) at a bank or credit union. The income generated on these deposit accounts is referred to as the annual percentage yield (APY).
Interest rates have an impact on everyone, from individuals to corporations to nations. They are a monetary policy tool set by central banks that is used to measure corporate and consumer borrowing.
What happened on the stock market today? How do interest rates affect cryptocurrency stocks?
The predictions for interest rates and their real-time changes are closely watched by traders in the cryptocurrency market. Why? Because favorable trading conditions improve investors’ desire for higher risk assets such as cryptocurrencies, and this demonstrates the interconnections between the crypto ecosystem and macroeconomic issues.
Changes in interest rates and borrowing costs may have a different impact on crypto markets than on traditional assets. Financing costs, for example, influence investing firms’ decisions to put money in businesses that offer to build blockchain applications (such as Ethereum), and hence encourage blockchain adoption. Similarly, for blockchains with no application layer and simply a transaction layer (Bitcoin, for instance), greater expenses for funding mining rigs and warehouse space will reduce miners’ marginal profitability. There is no question that the Fed has a significant impact on stock and crypto markets. However, it should also be highlighted that the value of cryptocurrency is also influenced by various factors other than interest rate and the cost of borrowing.