How the Fed influenced the crypto bear market
The world’s largest central bank, the Federal Reserve, increased interest rates last month by a half percentage point, breaking a two-decade streak. The cause was to control four-decade-high inflation that was partly fueled by the extraordinary measures the Fed took two years earlier to bolster the economy when the Covid-19 outbreak started to spread. But how could the Fed make such substantial changes in two years that seemed to go in completely different directions? And with inflation still rising, what does that mean for the economy? So let’s look more closely.
- The Fed’s primary goals are to keep prices steady, achieve maximum employment, and preserve the banking sector credit flow. Setting interest rates, which influence how inexpensive (or expensive) it is to borrow money, is one of its main management strategies. The Fed intervened to keep the economy afloat in 2020 when the Covid-19 outbreak forced the closure of everything from businesses to schools. By lowering interest rates to zero, the Fed also lowered lending rates between banks. Due to the low-interest mortgages and loans that resulted in things like vehicles and small enterprises, people continued to be engaged in the market despite the economic shock caused by the pandemic.
- Quantitative easing, sometimes known as printing more money, was a method the Fed used to assist the financial markets during the crisis. It involved purchasing Treasury securities and mortgage-backed assets to infuse liquidity (cash) into the market. As a result, since early March 2020, the Fed’s balance sheet has increased by more than doubling, reaching $8.95 trillion. The economy was ultimately supported by this abundant liquidity, or “cheap money,” which encouraged riskier assets like tech stocks and cryptocurrencies by providing more consumer cash.
- One of the drawbacks of all that additional money? Inflation. The U.S. Consumer Price Index (CPI), which monitors the yearly inflation rate of essential categories like housing and food, increased by 8.6 percent in May, the most significant increase in 41 years, due to solid employment growth and increased consumer demand. The economic impact of Russia’s invasion of Ukraine and China’s ongoing Covid lockdowns, as well as the government’s $1.9 trillion Covid stimulus package, are some of the causes for the price increase, according to economists.
- The Fed is currently concentrating on quantitative tightening, which involves removing liquidity from the financial markets by reducing its balance sheet. The central bank has begun to reduce its holdings of Treasury securities from the epidemic era this month and intends to step up those measures in September. The Fed is now aiming for interest rates of 0.75 percent to 1 percent, which makes borrowing money more expensive. Fed Chairman Jerome Powell has indicated plans to raise those rates this year, maybe as early as this week. One early sign of how these initiatives affect customers is: As house loans become more expensive and home sales stall, mortgage demand has reached a 22-year low.
Why is it important? The Fed’s tightening policies and geopolitical worries have dampened the financial markets, pushing down equities and cryptocurrencies as investors shun riskier investments. However, some economists have expressed concern that initiatives to control inflation would push the American economy into a downturn. So can the Fed execute its complex, much-discussed “soft landing”? “The Fed has to thread the needle,” says the head U.S. economist at JPMorgan. A recession is possible to avoid, but it is also very likely.