What is the Fed?
FED or Federal Reserve System is the US central banking system that was established on December 23, 1913. Its function is to manage the US money supply. This is why many people misunderstood it prints money but in fact, the Fed doesn’t do that, only the US Department of Treasury can print money. However, because of the magnitude of the US’ influence on the global economy, the Fed is known as one of the most important financial institutions in the world.
Structure of the Fed:
- A seven-member Board of Governors appointed by the President of the United States
- Federal Open Market Committee: is an important component of monetary policy and manages the US money supply
- Twelve regional Federal Reserve banks, each responsible for a certain region of the US
- And other member banks.
The Fed’s responsibilities
The Fed is responsible for all monetary policy of the United States:
- Establish monetary policies, supervise and regulate banks, maintain financial stability and provide banking services
- Supervise and regulate financial systems, maintain financial stability in the country
- Protect consumers and develop communities through conducting research and analysis of consumer trends, and activities, and establishing consumer regulation
In a nutshell, the Fed is a watchdog of the nation’s financial system, established with a mission to help the economy run as efficiently as possible. Therefore, any decisions by the Fed (such as setting interest rates or managing the money supply) will have direct impacts on the economic system as well as the economic outlook of the United States.
How does the Fed affect the crypto market?
As mentioned, any moves of the Fed, like raising interest rates, have a big impact on the crypto market’s growth. As a result, Fed meetings or any decisions of the Fed also receive a lot of attention from crypto institutions, analysts, and investors. So, how did interest rates affect the market?
In 21 months before 2022, the Fed injected more money into the economy that created a low-interest-rate environment where money was cheap and easy to borrow. This low-interest-rate environment has facilitated capital inflows into high-risk assets such as cryptocurrencies and stocks. That is also the reason why these assets offer extremely high returns.
On the other hand, when the Fed raises interest rates to control inflation, the stock and crypto market will face many difficulties. When interest rates increase too quickly, economic growth may slow or give way to a recession. At this point, investors tend to return to traditional assets with lower risk and sell off digital assets.
In June of this year, US inflation reached the highest level in the past 40 years. On June 15, the FED also officially increased the interest rate to 0.75% – the highest level in 30 years. The next day, the stock market immediately showed signs of decline when the Dow Jones fell 765 points, the S&P fell 3.4%. On the same day, Bitcoin dropped to $20,971, hitting an 18-month low, losing 69.53% of its value from its November 2021 ATH. The second largest coin in the crypto market, Ethereum, also fell 77.3% and traded at $1,110.63.
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