The US Federal Reserve authorities are maintaining the status quo even after news that inflation is cooling down in the country. The interest rate is still high between 5.25% and 5.50%.
Jerome Powell, the chief of the US Federal Reserve is of the opinion that interest rates cannot be cut all of a sudden without further solid evidence stating that the disinflation trends will persist.
According to the concerned authorities, the inflation data for May 2024 has not shown any rise, but the data for the past 12 months is higher at 2.6% than the target of 2%. The trend is towards decline but has not yet reached the anticipated mark.
While Powell admits a downward trend in the price of essential commodities, he says that the authorities should wait for some more time to get a clearer picture of the inflation-laden market before deciding on interest rate cuts.
He said that the US economy is strong enough to take the burden of high interest rates and a swift rate cut without carefully analyzing the market trends may lead to undesired outcomes.
However, investors are looking forward to the Federal Reserve cutting the interest rates by a quarter-point in its coming meeting in September.
What are the Risks of Keeping the Interest Rates High?
The central authorities of a nation implement high interest rates to tackle the problem of inflation in the domestic market.
The interest rates by the US Federal Reserve, also known as the Federal Funds Rate, decide the rate at which US banks lend and borrow money in a particular period.
With a higher interest rate, fewer people make investment decisions to aid the market. The amount of disposable income that the consumers have at hand will reduce, forcing them to slow their spending.
Since this lack of availability of instant funds affects all areas, overall productivity is affected, which slows down the economy.
The Effect of High Interest Rates on the Crypto Market
High interest rates will also affect the crypto market as much as other aspects of the market. The general market prices of cryptocurrencies are on a decline.
Even though cryptocurrencies were initially thought of as an alternative economic system that would be unaffected by the fluctuations in the mainstream market, the current dip in prices due to the high interest rates has come as a surprise.
The crypto prices have followed suit with the stock market in price fluctuations with respect to the interest rates.
With high interest rates, investors will back out from investing in high-risk instruments such as cryptos in fear that the fluctuations in liquidity will affect their investment prospects.
The fact that low spending is a consequence of high interest rates is not different in the case of cryptocurrencies as well. The amount of crypto earnings will fall and the listed prices on the exchange will dip.
The unchanged interest rates and the associated price cut are mainly based on the expectations that investing in cryptos would be a loss-making affair.
So investors will think twice before investing in the already volatile crypto assets at periods of high interest rate; this lack of demand will consequentially reduce the price of the crypto coins.
Other factors Affecting the Price of Cryptocurrencies
The major developments in the mainstream economy of powerful states like the US will affect the decentralized finance markets too. Here are some other factors that play a role in the downfall of cryptocurrency prices.
The popularity of a cryptocurrency, determined by the number of cryptocurrency exchanges where it is listed is a main factor that affects the price of cryptocurrencies. If a coin is delisted from different exchanges for some reason, then its price will fall.
The sudden negative market sentiments caused by any unfavorable news about a particular currency will cause its price reduction.
Another factor that might cause a price drop is the liquidity of a token. Tokens with less liquidity will be suddenly affected if there are any market fluctuations.
The Bottom Line
It is now clear that even though cryptocurrencies were thought of as a separate entity, unrelated to the mainstream market, the general trends in various macroeconomic factors affecting the mainstream financial sector can affect the cryptocurrency market too.
