The Federal Reserve's pursuit of a 'reverse wealth effect' is undermining crypto
The Federal Reserve’s strategy to hike interest rates may continue, making it difficult for the crypto industry to bounce back. For crypto assets to become the hedge against inflation, the industry needs to explore ways to decouple crypto from traditional markets. Decentralized finance (DeFi) can perhaps offer a way out by breaking away from legacy financial models.
In the 1980s, Paul Volcker, the chairman of the Federal Reserve Board, introduced the interest hiking policy to control inflation. Volcker raised interest rates to over 20%, forcing the economy into a recession by reducing people’s purchasing capacity. The strategy worked, and the Consumer Price Index (CPI) went down from 14.85% to 2.5%. Even now, the Federal Reserve continues to use the same methodology to bring down high inflation rates.
In 2022, core U.S. inflation reached a 40-year high, making the Federal Reserve consistently hike interest rates throughout the year. This has negatively hit the crypto market. Mike McGlone, the Senior Commodity Strategist at Bloomberg Intelligence, explained that the Fed‘s “sledgehammer” has “been pressuring crypto this year.” McGlone believes that the Fed’s policies could lead to a crash that is worse than the 2008 financial crisis.
Market data shows a clear pattern where the Federal Reserve’s interest rate hikes correspond to significant drops in cryptocurrency prices. For example, Bitcoin (BTC) prices declined on May 6 after the Fed’s meeting on May 3 and 4 to increase interest by 0.5%. Similarly, Bitcoin fell to $17,500 after the Fed meeting on June 14 and 15, where they raised interest rates by 0.75%.
The rate hike in June was a significant factor for cryptocurrencies like BTC and Ether (ETH) to fall 70% since their
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