What are Fed rates, and how do they affect your crypto?

Table of Contents

1. What Are Fed Rates?
2. How Do Fed Rate Decisions Work?
3. Historical Fed Rate Changes
4. Why Fed Rates Matter to Crypto
5. Direct and Indirect Effects on Crypto Markets
6. What to Watch For as a Crypto Trader
7. FAQs

The Federal Reserve,, the central bank of the United States (also commonly referred to as the Fed), is debatably the most powerful central bank.

The Federal Reserve has two primary economic goals: maintaining price stability and promoting maximum employment.

To control inflation, the Fed raises interest rates when prices increase too quickly, aiming to slow economic growth.

On the other hand, if the economy needs a lift, the Fed lowers interest rates to encourage spending and job creation.

In this article, we explain the Fed rates, the rates in the past years, and how the changes in the Fed rate affect your cryptocurrency as a trader, holder, or investor.

What Are Fed Rates?

The "fed rate," officially known as the Federal Funds Rate, is the target interest rate range determined by the Federal Open Market Committee (FOMC), the policy-setting arm of the Federal Reserve.

The FOMC’s decisions on this rate have a significant economic impact and are closely watched worldwide.

For instance, on September 18, 2024, the Federal Reserve cut the federal funds rate by 50 basis points to a range of 4.75% to 5%, making headlines across the U.S.

This was the first rate cut in over four years and marked a strategic shift aimed at supporting economic growth and limiting potential increases in unemployment.

Changes in the federal funds rate can influence a wide array of economic factors, from mortgage and credit card interest rates to business investments and stock market trends.

via GIPHY

How Do Fed Rate Decisions Work?

The Federal Reserve adjusts the target range for the federal funds rate based on economic conditions.

These rate changes help the Fed fulfil its dual mandate: maintaining price stability and maximising employment.

Here’s how it works:

• When the economy is overheating, and inflation is high, the Fed raises interest rates to cool things down.
• Conversely, when the economy shows signs of weakness and unemployment rises, the Fed cuts rates to encourage growth.

The Fed considers a range of economic data when making these decisions, including gross domestic product (GDP), consumer spending, and industrial production.

Major events, like financial crises, global pandemics, or significant geopolitical incidents, also play a role.

Economists and investors closely watch the Fed’s rate adjustments, focusing on changes to the federal funds rate.

The Fed doesn’t directly set interest rates for each bank; instead, this benchmark rate acts as a lever, influencing other borrowing and saving rates throughout the economy.

Much like a chain reaction, a rate cut or hike affects the cost of nearly every type of consumer financing—from credit card interest to auto loans and mortgages.

Historical Fed Rate Changes

The federal funds rate has seen substantial shifts over time, adapting to evolving economic conditions and policy needs. 

While the Fed typically makes adjustments in 25-basis-point increments, it may implement larger changes—like 50 basis points or more—when a stronger economic response is needed.

For example, after the 2008 financial crisis, the Fed kept rates close to zero for several years to support recovery.

Conversely, during high-inflation periods, it has raised rates more aggressively to cool down the economy.

Over the years, the federal funds rate has varied widely to match economic circumstances.

In the early 1980s, it reached as high as 20% to combat inflation.

During the Great Recession, it was slashed to a record low of 0% to 0.25% to encourage growth.

In March 2020, the target rate range was set between 0% and 0.25%. Starting in 2022, the Fed began gradually increasing the rate to counter inflation, continuing adjustments into 2024.

The FOMC raised the target rate from 5.25% to 5.5% in July 2023 and maintained this range in subsequent meetings. 

However, on September 18, 2024, the committee announced a 50-basis-point cut to a range of 4.75% to 5%, citing "progress on inflation and the balance of risks." 

The Fed also confirmed it would continue reducing its holdings of Treasury securities, agency debt, and mortgage-backed securities (MBSs).

Why Fed Rates Matter to Crypto

The U.S. Federal Reserve's interest rates impact the cryptocurrency market as they influence investor behaviour, liquidity, and risk sentiment. 

Here's an in-depth look at why Fed rates matter to crypto.

1. Investor Behavior and Risk Appetite

• Impact of Rate Increases: When the Fed raises interest rates, borrowing becomes more expensive, and the returns on "safe" assets like government bonds also rise. This shift draws investors away from riskier assets, including stocks and cryptocurrencies, as they seek more stable returns. Higher rates mean investors are incentivised to move towards lower-risk investments, reducing demand in the crypto market.
• Risk Appetite Decrease: Cryptocurrencies are considered high-risk and volatile assets. Rising rates tend to make investors less willing to take risks, especially in speculative areas. A "risk-off" environment often leads to crypto price declines, as cautious investors may pull out of or avoid investing in the crypto market.

2. Liquidity and Access to Capital

• Borrowing Costs: Crypto firms, especially those reliant on venture capital or debt for expansion, may find it harder to access capital during rate hikes. Higher borrowing costs mean less capital for investments in technology, infrastructure, and liquidity for trading, which can weaken the broader crypto ecosystem.
• Market Liquidity: As interest rates rise, liquidity in the market often tightens, and this has significant implications for crypto trading. With less cash flow and fewer new investments coming in, the volume and liquidity in the crypto market can decrease. Lower liquidity can lead to greater price volatility, as fewer traders are buying or selling at any given time.

3. Stablecoin Dynamics and Yield Farming

• Cost of Holding Stablecoins: Many investors use stablecoins as a temporary haven or a way to earn yield in the crypto space. But as Fed rates rise, the appeal of yield-bearing stablecoin activities, such as yield farming, diminishes. Investors may prefer traditional financial products that now offer higher returns with less risk.
• Challenges for Stablecoin Issuers: Some stablecoin issuers back their reserves with traditional assets like short-term U.S. Treasury bonds. As rates increase, the yield on these assets rises, which could positively impact the revenue of some stablecoins. However, this does not offset the reduction in demand for yield-bearing activities within the DeFi ecosystem as safer alternatives emerge.

4. Impact on Bitcoin and "Digital Gold" Narrative

• Inflation Hedge Appeal: Bitcoin is often seen as "digital gold," meant to serve as a hedge against inflation and currency devaluation. When rates are low, inflation concerns drive investors to alternative assets like Bitcoin. But as the Fed raises rates to control inflation, it strengthens the U.S. dollar, making Bitcoin's inflation hedge appeal less attractive.
• Dollar Strengthening Effect: Higher interest rates tend to strengthen the U.S. dollar as they attract foreign capital. A strong dollar generally correlates with weaker prices in dollar-denominated assets, including Bitcoin. The stronger dollar can, therefore, weigh down Bitcoin prices, especially for international investors, who may face relatively higher costs in purchasing crypto.

5. Macroeconomic Uncertainty and Sentiment

• Market Sentiment: Fed rate changes affect overall market sentiment, which influences both traditional and crypto investors. Rate hikes signal that the Fed is focused on curbing inflation, but this often increases fear of a potential economic slowdown. When economic uncertainty rises, people may sell off crypto assets to preserve capital.
• Correlation with Equities: Over recent years, crypto markets have shown increased correlation with stock markets. This means that Fed rate hikes affecting stock prices also tend to impact crypto. Rate increases can trigger broader selloffs across both equities and crypto, particularly when institutions are heavily involved in both sectors.

6. DeFi and Lending Markets

• Borrowing and Lending Dynamics: Decentralised finance (DeFi) platforms, where people borrow and lend crypto assets, are also affected. Rising Fed rates increase traditional lending rates, which could potentially lead to a decrease in demand for DeFi lending products as traditional yields rise. This can reduce the total value locked (TVL) in DeFi, which is a critical metric of the health and utility of DeFi protocols.
• Risk and Liquidity Premiums: When rates rise, the cost of capital within DeFi protocols goes up, leading to an increased risk premium. This shift may deter some participants from leveraging or borrowing within DeFi, which can lead to a reduction in trading volumes, liquidity, and overall market activity on these platforms.

7. Influence on Crypto Mining and Operating Costs

• Energy and Operational Expenses: Crypto mining operations rely on energy, a cost influenced by macroeconomic conditions. As rates increase, so do operational expenses, especially if inflation remains persistent, driving energy prices higher. Miners with less profit margin may shut down operations, decreasing the security and decentralisation of certain proof-of-work blockchains, like Bitcoin.
• Debt-Financed Mining Operations: Many mining companies rely on debt to fund their equipment and energy needs. As interest rates rise, the cost of maintaining or expanding mining operations also increases, which could lead to lower output or cause some companies to go bankrupt.

8. Capital Inflows and Regulatory Responses

• Venture Capital Impact: In a low-rate environment, venture capital (VC) funding flows into high-risk, high-reward areas like crypto projects. When the Fed raises rates, VC funds may pull back, as they can get more attractive returns from traditional investments. Reduced funding can slow down innovation, product development, and the overall growth of new crypto projects.
• Regulatory Influence: Rate increases often coincide with a more cautious regulatory stance on financial markets, including crypto. This can lead to stricter oversight and scrutiny, adding further challenges for crypto companies and reducing the ease of new entrants into the space.

via GIPHY

Direct and Indirect Effects of The Fed Rates on Crypto Markets

Direct Effects: Impact on Bitcoin and Major Crypto Prices After Recent Rate Hikes or Cuts

1. Price Volatility Following Rate Hikes or Cuts

• Immediate Market Reaction: When the Fed announces a rate hike or cut, the crypto market often responds quickly, just as it does with traditional assets. Rate hikes, signaling a more "hawkish" stance, can lead to immediate drops in Bitcoin and major altcoin prices as investors reassess risk. Rate cuts, on the other hand, signal an easing stance, which often results in a short-term price boost for crypto as liquidity and market optimism increase.
• Enhanced Price Volatility: Cryptocurrencies are already volatile assets, and rate adjustments can exacerbate this. After a rate hike, Bitcoin might experience sharp dips due to sell-offs, while rate cuts can trigger rapid price increases as liquidity flows back into riskier assets.

2. Dollar Strength and Its Effect on Bitcoin

• Correlation with the U.S. Dollar: Interest rate hikes tend to strengthen the dollar. This happens because higher rates attract foreign investors seeking better returns, which increases demand for the dollar. Since Bitcoin and most major cryptocurrencies are priced in dollars, a stronger dollar can make them relatively more expensive for international buyers, potentially dampening demand and driving down prices.
• Inverse Price Movement: Bitcoin often shows an inverse relationship with the dollar. When the dollar strengthens, Bitcoin prices tend to decline, and when the dollar weakens (e.g., after a rate cut), Bitcoin and other major cryptos may see an upswing as demand increases, partly because foreign investors can buy in at better exchange rates.

3. Bitcoin as an Inflation Hedge vs. the Fed’s Inflation Control

• Bitcoin’s Inflation Hedge Narrative: Bitcoin is sometimes seen as a hedge against inflation, akin to digital gold. This narrative holds strong when inflation is high and the Fed is not curbing it effectively. However, when the Fed raises rates to control inflation, it diminishes Bitcoin's appeal as an inflation hedge since the traditional monetary system is perceived as addressing inflation.
• Market Response to Fed’s Success: If the Fed’s rate hikes successfully reduce inflation, it strengthens the U.S. economy’s appeal over alternative assets like Bitcoin. As inflation drops, the urgency to hold Bitcoin as a hedge weakens, causing prices to stagnate or decline.

4. Liquidity and Borrowing Costs for Crypto Participants

• Higher Borrowing Costs for Crypto Investors: As the Fed raises rates, borrowing becomes more expensive across all markets, including the crypto space. Crypto investors who use leverage to increase their positions might pull back due to higher costs, reducing overall trading activity and liquidity.
• Effect on Institutional Participation: Many institutional players have entered the crypto space in recent years and are significantly impacted by borrowing costs. When rates are high, their financing costs rise, leading to more cautious investment strategies in risky assets like crypto. This can reduce demand and lower prices for Bitcoin and other major cryptocurrencies.

via GIPHY

Indirect Effects: Changes in Stock Markets, Risk Appetite, and Institutional Investment Trends

1. Correlation with Stock Market Movements

• High Correlation During Rate Hikes: Bitcoin and other cryptocurrencies have shown an increasing correlation with stock markets, especially with tech stocks and the NASDAQ. When the Fed raises rates, stock prices often fall as the cost of capital increases and investors re-evaluate growth stocks. This decline in the stock market frequently pulls down Bitcoin and other major crypto assets as investors sell off assets across the board to avoid further losses.
• Tech-Driven Sentiment: Major crypto assets like Bitcoin and Ethereum are sometimes seen as tech-oriented, speculative investments, making them more susceptible to the same market sentiments driving tech stocks. Rate hikes, which tend to deflate high-growth sectors, indirectly depress the crypto market as well.

2. Shifts in Risk Appetite Across Financial Markets

• Flight to Safety: Rate hikes tend to create a "risk-off" environment in which investors move away from highly volatile speculative assets like cryptocurrencies. This causes a decline in capital inflows to crypto as risk-averse investors pivot towards safer investments like bonds, which offer higher yields with less risk after rate hikes.
• Effect on Retail and Institutional Investment: Both retail and institutional investors may reduce their exposure to crypto assets during periods of high rates. Retail investors may see high-rate environments as a time to seek stability, moving funds from high-risk crypto to savings accounts or bonds. Institutions might adopt a more conservative stance, shifting capital towards assets with steadier returns, which in turn dampens crypto investment.

3. Impact on Institutional Investment Trends and Capital Allocation

• Institutional Withdrawal from Crypto: Many institutional investors entered the crypto market during a period of low rates when traditional assets offered limited returns. Higher interest rates create more attractive returns in traditional financial products, reducing the need for institutions to pursue high-risk assets like Bitcoin and Ethereum. This shift leads to outflows from institutional investments in crypto and a subsequent drop in crypto prices.
• Reduced VC and Private Equity Interest: Rate hikes make capital scarcer and more expensive. This significantly impacts venture capital and private equity firms, which are key funding sources for crypto projects and startups. As these firms become more conservative in response to higher rates, crypto projects face reduced funding, which indirectly impacts the growth and valuation of major cryptos as fewer new projects or protocols are developed to sustain long-term interest in the ecosystem.

4. Influence on Global Investment and Capital Flows

• Emerging Markets and Global Risk Appetite: The Fed’s rate decisions impact global markets and capital flows. Higher U.S. interest rates lead to capital outflows from emerging markets as investors seek returns in the dollar and U.S.-based assets. Many crypto investors in emerging markets might find it more challenging to access capital or maintain investments, potentially reducing demand for Bitcoin and other major cryptos.
• Shifts in Dollar-Denominated Crypto Investments: As the Fed increases rates and the dollar strengthens, global investors face a higher exchange rate cost to purchase dollar-denominated assets like Bitcoin. This additional cost can lead to decreased global demand for crypto as investors either pause investments or withdraw from the market to avoid unfavourable exchange rates.

via GIPHY

What to Watch For as a Crypto Trader

1. Understanding Rate Expectations and Market Impact

• What Are Rate Expectations? Rate expectations are market predictions about whether the Federal Reserve (or another central bank) will raise, lower, or maintain interest rates. They are influenced by economic indicators such as inflation, employment numbers, and economic growth data. These expectations are often priced into asset markets before the Fed even takes action.
• Why Rate Expectations Matter for Crypto: Crypto is sensitive to risk sentiment and liquidity changes. Rate expectations influence market behaviour across stocks, bonds, and crypto as they signal the economic climate. For example, expectations of rate hikes can lead to a decrease in liquidity and a shift away from riskier assets, impacting Bitcoin and major altcoins.

2. Economic Indicators to Watch

• Inflation Data (CPI and PCE): Inflation reports like the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) are key indicators. Higher-than-expected inflation numbers increase the likelihood of a Fed rate hike, which often signals a risk-off environment where investors might move out of crypto. Lower inflation numbers, by contrast, suggest that the Fed might pause or cut rates, creating a more favourable environment for crypto investment.
• Employment and Labor Market Reports: Strong employment data (e.g., low unemployment and high job creation) can signal economic resilience, prompting the Fed to consider rate hikes to prevent overheating. This can negatively affect crypto prices as investors adjust for potentially higher rates. However, weak employment data might signal a possible economic slowdown, leading the Fed to pause or reduce rates, which could be positive for crypto.
• Federal Reserve Meeting Minutes and Statements: The minutes from Fed meetings and statements from key officials provide insights into the Fed’s thinking. Hawkish language (indicating a preference for higher rates) generally pressures crypto prices, while dovish language (favouring lower rates or more accommodative policy) can lead to optimism and positive price action in crypto markets.

3. Analyzing Market Sentiment and Fed Rate Expectations

• Interest Rate Futures and the Fed Funds Rate: Futures markets, particularly those for federal funds rates, offer a view into where the market expects rates to go. By tracking these futures, traders can gauge expectations of rate hikes or cuts. In a rate hike, crypto traders might anticipate downward pressure on Bitcoin and other major cryptos, whereas anticipated rate cuts can boost risk appetite, favouring upward movement.
• Tracking the Dollar Index (DXY): The U.S. Dollar Index (DXY) is a crucial indicator of the dollar’s strength relative to other major currencies. Rate hikes usually strengthen the dollar, which can lead to lower demand for crypto from international investors who face a higher cost in dollar terms. A rising DXY index typically correlates with lower crypto prices, while a declining DXY may signal potential price support for Bitcoin and other major cryptocurrencies.

4. Interpreting Financial Markets for Rate Expectations

• Bond Yields: Bond yields, particularly the yield on 10-year U.S. Treasury bonds, reflect the market's inflation and rate expectations. Rising yields indicate that the market expects higher rates of inflation, which can reduce the appeal of crypto. If yields are falling, the market may be anticipating lower rates or an economic slowdown, which could support crypto demand as investors look for alternative growth opportunities.
• Stock Market Movements: The stock market, especially tech stocks, often moves in tandem with crypto due to the high-risk, high-reward profile of both asset classes. Rate expectations influence stock market behaviour, and crypto traders can use stock market trends to gauge general risk sentiment. For example, a declining tech-heavy NASDAQ during a period of rate hike expectations often correlates with crypto price declines.

5. Timing Crypto Market Movements Based on Rate Expectations

• Front-Running Rate Announcements: Markets frequently "price in" rate expectations well in advance. Crypto traders can use this to their advantage by following economic data releases that might shift expectations before the actual Fed decision. For instance, strong inflation data ahead of a Fed meeting might lead to a pullback in crypto as the market prices in a potential rate hike.
• Monitoring "Fed Pivot" Scenarios: A "Fed pivot" refers to a shift from raising rates to holding or cutting them. Signs of a potential pivot, such as slowing economic growth or declining inflation, often boost speculative assets like crypto. A pivot to lower rates typically signals increased liquidity, risk appetite, and support for crypto prices. Watching for signs of a pivot, like Fed officials signalling a potential rate cut, can provide crypto traders with an early advantage.

6. Practical Steps for Crypto Traders to Monitor Rate Expectations

• Subscribe to Economic Calendar Alerts: Key economic reports (like CPI and employment numbers) are scheduled and can be followed through financial calendars. Setting alerts for these releases helps traders react quickly to any rate-sensitive data that might affect crypto prices.
• Follow Federal Reserve Commentary: The Fed’s communications are essential in setting rate expectations. By tracking speeches and statements from Fed members, crypto traders can get an inside look at potential shifts in policy. Major Fed events like the FOMC meetings are particularly impactful.
• Use Technical Analysis with Economic Indicators: Combining technical analysis with economic indicators can help crypto traders identify price trends in response to rate expectations. For instance, tracking support and resistance levels in Bitcoin can help identify potential entry or exit points ahead of expected rate changes, giving traders a better sense of when to capitalise on price movements.

7. Managing Risk in Rate-Sensitive Environments

• Hedging with Stablecoins: During times of rate uncertainty or expected rate hikes, moving a portion of holdings to stablecoins can reduce exposure to volatility. This strategy can help crypto traders protect their capital during volatile market periods.
• Using Stop-Losses and Limit Orders: With rate changes expected, volatility is common. Setting stop-losses and limit orders can help traders lock in profits or minimise losses in response to rate-driven market moves. This is especially useful for protecting against sudden downturns following a rate hike or unexpected Fed statement.
• Diversification in DeFi and Staking: During anticipated rate hikes, investing in decentralised finance (DeFi) protocols or staking can offer more stable returns. This approach diversifies a portfolio while still participating in the crypto ecosystem and can offset potential losses in more volatile crypto assets.

FAQs about Fed rates and how they affect your crypto?

Q: How will the Fed interest rate affect crypto?

A: When the Federal Reserve increases or decreases interest rates, the cryptocurrency market reacts similarly to traditional assets. A rate hike, indicating a more conservative approach, can lead to immediate drops in Bitcoin and other major altcoins as investors reconsider risk. Conversely, rate cuts signal a more relaxed stance, resulting in a price increase for cryptocurrency as market confidence and liquidity improve.

Q: What is the current Fed rate?

A: The current federal funds rate as of November 04, 2024 is 4.83%.

Q: How often does the Fed change rates?

A: The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate.

Q: Is a lower interest rate good for crypto?

A: Generally, yes. A lower interest rate reduces the cost of borrowing and can encourage more spending and investment in riskier assets, including crypto. When rates are low, investors may seek higher returns in markets like crypto, which can increase demand and potentially drive up prices.

Q: Is a rate cut good for BTC?

A: Typically, yes. A rate cut often increases liquidity in the market and makes traditional savings options less attractive, potentially driving more investment into Bitcoin (BTC) and other cryptocurrencies as alternative assets. This shift in investor behaviour can support price increases for BTC.

Q: How does the Fed set interest rates?

A: The Federal Open Market Committee (FOMC), a branch of the Federal Reserve, sets the interest rate based on economic indicators like inflation, unemployment, and GDP growth. They adjust rates to stabilise the economy, either by slowing down (raising rates) or stimulating growth (lowering rates).

Q: Why does the Fed raise interest rates?

A: The Fed raises interest rates primarily to control inflation. By making borrowing more expensive, higher rates slow down spending and borrowing, which can reduce inflation. This action can cool an overheated economy but may also lead to reduced investment in markets like crypto.

Q: When does the Fed announce interest rates?

A: The Federal Reserve announces interest rate decisions after each of its eight scheduled Federal Open Market Committee (FOMC) meetings held throughout the year.

Disclaimer: This article was written to provide guidance and understanding. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.