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Monday, January 30, 2023

The Fed rate or Why everyone is watching the US economy?

The Fed rate or Why everyone is watching the US economy?

Bitcoin / U.S. dollar BITSTAMP:BTCUSD

The Fed or the Federal Reserve System is a kind of analogue of the central bank in the United States. It is an independent body and receives powers from the US Congress. Its independence lies in the fact that all decisions on monetary policy do not have to be approved by the authorities and even the president. We can say that the Fed does not belong to anyone, because. after agreement with the Senate, the main positions are appointed by the President of the United States, but the owners are private individuals.

The functions of the Fed are the same as those of the central bank: issuing money, controlling private banks, changing the key rate, and other important decisions for the US economy, which affects the economy of the whole world. Let's analyze them in more detail:

maintaining a balance between the financial and social spheres;
protecting the interests of participants in banking operations;
dollar issue;
control of the internal financial market;
acting as a depository for large organizations;
supporting the functioning of payments within the country and between countries;
maintaining liquidity.

And now let's take a look at the questions about the impact of the Fed's actions on the crypto economy in order, so that you have a general picture of what is happening.

1. Why do many investors and traders in stocks and cryptocurrencies constantly follow the news from the US, especially the speeches of the head of the Fed?

One of the Fed's main tools, through which they influence the US economy, is to raise or lower the key rate. The Fed sets the percentage rate at which loans are issued to banks. This, in turn, affects other market segments, and the effect is different for each.

This has a direct impact on the bond market: the higher the rate, the higher the yield.

However, the effect on the stock market is completely opposite, because the reduction in the rate is followed by an adjustment in other lending rates. At a low rate, companies' businesses can grow faster. Due to this, stock quotes of many companies also increase due to the increase in their capitalization. Consumer and business confidence is on the rise, the real estate market is rebounding, and corporate earnings are rising, which in turn has a positive effect on share prices.

As the interest on loans decreases, the interest on deposits also decreases. There is more money in the financial system, which encourages people to look for more profitable areas of investment.

Yes, just a second. We feel that you may get confused or never understand what it is and why everything works the way it does. Let's explain with a very simple example.

The Fed rate is the percentage at which the main bank lends to other banks. If it falls, then other banks can take out a loan at a low interest rate and also issue loans with a small interest rate for organizations and individuals, including mortgages and credit cards. The decline in market interest rates encourages people to take out loans and buy various goods, invest in real estate and invest. The interest on deposits is falling, it is becoming less profitable to keep money on deposits, and people are looking for more attractive ways to invest - these are, first of all, stocks. Due to increased demand, the price of stocks and indices rises. And if the main indices grow, such as the NASDAQ, S&P500 or the Dow Jones industrial index, then Bitcoin grows, and other cryptocurrencies follow it.

At the same time, if the Fed rate rises, then people pull their savings out of riskier types of investment into more stable ones (deposits / deposits). Thus, the capitalization of the stock and cryptocurrency markets is falling, followed by a price drop. As you have noticed, everything in the world of economics is interconnected, and it is extremely difficult to explain all its principles in one article. We just want to bring you to the relationship between the Fed rate and the cryptocurrency market.

And here comes the next question!

2. Why is Bitcoin most of the time correlated with major stock market indices?

Everything is a little easier here. Previously, Bitcoin was something incomprehensible to most - an uninteresting technology and hype. But as blockchain technologies are introduced into everyday life (mass adoption), Bitcoin has turned into a risky, but quite common asset of the market. Because of this, relatively recently, “old” money has entered this market. People who used to earn only in the stock market and large companies entered the market. Large investors have developed strategies for trading and investing. Thus, for them, Bitcoin has become a financial instrument, just more risky. From that moment on, there was a high correlation with the stock market.

In conclusion, one of the important questions.

3. How do the US and the US dollar affect the entire world economy?

In the past, there was a situation when world trade and its institutions, as well as the world banking system, became pegged to the US dollar , central bank reserves began to accumulate mainly in dollars, and a financial market was formed with tools that allow you to effectively

place these reserves in dollar form. Simply put, most of the world uses the dollar, which is why it is the main reserve currency of the world. US hegemony, which influences the whole world, has been developing since 1944.

Let's summarize step by step to consolidate the information:

The American dollar and the US economy affect the entire world market, the first - because it has historically happened, and the second - because it is the largest in the world.

If the rate rises, then after it interest on loans and deposits rises. It becomes more profitable to invest in bonds and keep deposits in banks. Companies and people are shifting funds from risky stocks and cryptocurrencies to more stable types of investment: precious metals, government. bonds or simply withdraw to fiat.

If the rate falls, then after it interest on loans and deposits goes down. Companies and people are becoming more willing to take out credit, thereby increasing the financial system. Companies are developing business and increasing capitalization, people are starting to invest in more profitable instruments such as stocks and cryptocurrencies.

Via TradingView Ideas

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