Ouyi Research Institute: Where will the crypto market go after the Fed raises interest rates “the dust settles”?

On March 17, the much-watched Fed rate hike was finally settled. The Fed announced that it would raise the target range of the federal funds rate by 25 basis points to a level of 0.25% to 0.5%, which was basically in line with market expectations.

Fed Chair Jerome Powell said: ” If we think it’s appropriate to raise rates by 50 basis points, we’ll do it, and we can pretty well conclude that we need to do more quickly. The Fed has yet to make a decision on the next rate adjustment, monetary policy cannot 100% solve the inflation problem, and we do not expect progress on inflation in the near term.

Ouyi Research Institute believes that the Federal Reserve has issued hawkish remarks several times in the context of high inflation, saying that it is imperative to continue to raise interest rates to curb inflation. The market responded earlier than the official landing, and some funds left early. The market was on the sidelines to avoid the risks brought about by the tightening of monetary policy, so the market performance was relatively moderate after the announcement of the interest rate hike.

It is worth noting that this rate hike, as the first rate hike by the Federal Reserve since December 2018, is just the beginning, and the follow-up will continue to raise the benchmark interest rate and affect the global financial market. The plan to shrink the balance sheet announced in May as soon as possible will also bring more uncertainty to the market.

Why is the Fed raising interest rates?

When the world is concerned about the Fed raising interest rates and why they are raising interest rates, let’s talk about who the Fed is? The Federal Reserve is the largest holder of U.S. federal debt. The Federal Reserve System of the United States consists of the Federal Reserve Board in Washington, D.C. and 12 regional Federal Reserve Banks located in major cities across the country. The actual function is the central bank of the United States. The Federal Reserve obtains power from the United States Congress to exercise the duties of formulating monetary policy and supervising financial institutions in the United States.

As the central bank of the United States, the Federal Reserve shoulders the dual mission of maintaining price stability and promoting full employment. And interest rates are one of the most important tools for the Fed to achieve its policy goals, because interest rates can affect both unemployment and inflation.

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Through economics, interest rate cuts will stimulate employment, but may lead to inflation, and cryptocurrencies and gold have become financial investment targets. Conversely, raising interest rates can curb inflation and cool economic growth. Higher interest rates will lead to higher interest rates, less social capital flows, and lower consumer demand.

For ordinary users, banks raise interest rates and start a new round of deposits. Unlike the previous low interest rate, users invest funds in financial products such as funds, stocks, gold, and cryptocurrencies, and fight inflation by obtaining annualized interest rates. Once the interest rate is raised, funds will flow back to bank deposits, and most of the funds will be locked in the bank, resulting in a reduction of funds in the market and a sharp decrease in the amount of funds in financial products.

Raising interest rates has suppressed consumption, so why is the Fed raising interest rates? Today, the global economic integration is a foregone conclusion, and the dollar-dominated monetary system is also under a strong threat. The Federal Reserve raises interest rates to develop the U.S. economy through monetary policy adjustments, while for other countries, it indirectly evolves into financial harvesting .

With the occurrence of black swan events such as the global epidemic, it has also accelerated the return of global capital to the United States. With the increase in US interest rates, global capital will flow to places with high interest rates. In order to avoid capital outflows, many countries will follow the Fed to raise interest rates synchronously to maintain the exchange rate between their currencies and the US dollar.

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Once the underdeveloped countries follow the Fed to raise interest rates, they will inhibit the country’s economic development, cause the real economy to run out of food, and burst the country’s asset bubble. Therefore, the whole world is paying attention to the Fed raising interest rates. If some countries do not follow the interest rate hikes, it will cause capital outflow and the devaluation of their national currencies, which will also have an impact on economic development.

Why is raising interest rates a big negative for global financial markets?

The Fed’s interest rate hike led many central banks around the world to follow up. Looking back at the interest rate decisions of major central banks in the past week, the Bank of England raised the benchmark interest rate from 0.5% to 0.75%; the Bank of Japan kept the benchmark interest rate unchanged at -0.1%, and the 10-year The government bond yield target remained unchanged near 0%; Brazil’s central bank raised interest rates by 100 basis points to 11.75%. The Fed’s rate hike was actually within expectations, and the entire global market was fully expected to raise interest rates. The market has responded in advance and was not severely affected.

Coupled with the uncertainty of the situation in Russia and Ukraine, global production capacity issues, global supply chain issues and global energy revolution issues will all emerge. Commodities and crude oil rose sharply. The U.S. WTI crude oil futures price once exceeded $130 per barrel, gold soared to a record high of $2,058 per ounce, and the cryptocurrency continued to decline after a brief rise.

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(Data source: Ouyi OKX)

The Fed’s interest rate hike caused widespread losses in global financial markets, pushing up commodity prices, with wheat futures surging from $8 a bushel to more than $12 a bushel. The U.S. consumer price index soared 7.9 percent in February from a year earlier, hitting a 40-year high, according to data from the U.S. Department of Labor. Average hourly earnings, adjusted for inflation, fell 2.6% year-on-year in February, the biggest drop since May last year and the 11th straight month of declines.

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Previously, the outbreak of the new crown epidemic forced the Federal Reserve to release water, temporarily stabilizing the pace of the US economic recession, and also promoted the continued rise of cryptocurrencies. The money printed by the Federal Reserve due to the epidemic always needs real asset support. In the final analysis, raising interest rates is to allow global assets to flow to the United States to support the economic recovery of the United States, increase the initiative of the dollar, and stabilize its global dominance. However, the impact of interest rate hikes on the liquidity of the global financial market is huge, and there may even be black swan events such as local conflicts. After all, the economy is behind the war.

How will Fed rate hikes affect cryptocurrencies?

The dust of the Fed’s interest rate hike has settled, announcing that it will raise the target range of the federal funds rate by 25 basis points to a level of 0.25% to 0.5%, cut the median GDP growth forecast for this year by 1.2 percentage points to 2.8%, and reduce this year’s inflation expectations. , The median core PCE price index rose 1.4 percentage points to 4.1%. Fed Chairman Powell said that the Fed’s top priority is to restore inflation to 2%, and shrinking the balance sheet is equivalent to raising interest rates in disguise and is an effective tool for tightening monetary policy.

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The rate hike, the first by the Federal Reserve since December 2018, also affected the cryptocurrency market. Ouyi Research Institute believes that raising interest rates will lead to a reduction in market liquidity, bank interest rates and Treasury bond yields will increase, and the dollar will appreciate. Funds invested in financial management returned to the banks, treasury bonds and the dollar market. It also has a huge impact on the cryptocurrency market. Cryptocurrencies face the risk of selling, and a large amount of funds flow from the cryptosphere to stable investments. Increasing interest rates means extracting excess liquidity in the financial market. Support for the crypto asset market has weakened, creating more uncertainty.

The Federal Reserve raised interest rates after 1,183 days. Looking back at the Fed’s interest rate hikes in 2018, the global economic growth momentum has declined and demand has slowed. During the rate hike cycle, the U.S. economy is in a moderate recovery, and the inflation rate has not reached a high point. In contrast to the trend of cryptocurrencies, Bitcoin fell from $13,234 at the beginning of 2018 to $3,638 at the end of 2018. According to the Bitcoin K-line trend of the following European trading platform, it can be concluded that the impact of the Fed’s interest rate hike on cryptocurrencies was still great. of.

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(Data source: Ouyi OKX)

Ouyi Research Institute believes that if the Fed continues to raise interest rates six times in a row as planned, the impact on cryptocurrencies will be huge. In the face of the Federal Reserve’s announcement of raising interest rates, Bitcoin did not open a downward channel, but as early as the end of last year, the Federal Reserve announced that it would begin to reduce the scale of bond purchases and hinted that interest rates would rise, and crypto assets have started a downward mode. Crypto investor Michael Novogratz said bitcoin could continue to trade in a price range this year without a major rally as the Federal Reserve raises interest rates.

The Wall Street Journal reported that the Fed’s first interest rate hike in more than three years kicked off several subsequent interest rate hikes, with the goal of preventing the U.S. economy from overheating and controlling inflation that hit a 40-year high. In the future, the game between interest rates and inflation will be both a challenge and an opportunity for encrypted assets.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/ouyi-research-institute-where-will-the-crypto-market-go-after-the-fed-raises-interest-rates-the-dust-settles/
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