The Fed is in the middle of a diatribe: lower or maintain the interest rate. But while making the decision, it faces a market that continues to react to the inflation inherited from Joe Biden, Donald Trump's tariff war and a market (crypto and traditional) in decline.
The Federal Reserve's (FED) uncertain dance with interest rates has plunged financial markets, including crypto, into a sea of volatility. Indecision about when, how, and to what extent to adjust monetary policy has created a climate of fear and speculation, where every statement by a FED official is scrutinized. This uncertainty not only affects experienced investors, but also sows doubt among those who are just entering the world of digital assets. Are we on the verge of a new crisis? Or is this simply a necessary correction phase before a new boom?
The reality is that the impact of the Fed's monetary policy extends far beyond the borders of the United States, affecting emerging and developed economies alike. The strength of the US dollar, directly influenced by the Fed's decisions, can generate inflationary pressures in countries with weaker currencies. In addition, market uncertainty can lead to capital flight from emerging economies to safer dollar-denominated assets, further exacerbating their vulnerability. This complex web underscores the importance of understanding the global implications of the Fed's actions.
Fed indecision: A threat to financial stability
In any case, it is worth remembering that the Federal Reserve The Federal Reserve (FED), the central bank of the United States, plays a crucial role in global economic stability. Its decisions on interest rates and monetary policy have a direct impact on financial markets worldwide. When the FED shows indecision, as has happened in recent months, it creates uncertainty and volatility. Investors become more cautious, reduce their risk exposure and seek refuge in safer assets, such as the US dollar or Treasury bonds.
Financial history is replete with examples that illustrate the power of the Federal Reserve. From the 2008 crisis, where the Fed implemented unprecedented measures to prevent the collapse of the financial system, to the interest rate adjustments that triggered crises in emerging markets in the 1990s, the Fed has proven to be a dominant force in the global economy. Its core mandate, which includes maintaining price stability and fostering full employment, places it in a central position to influence investment decisions and economic growth worldwide.
This risk aversion quickly spreads to the crypto market, which has historically been more volatile than traditional markets. The lack of clarity about the future direction of the Fed’s monetary policy makes investment decisions difficult and can lead to sell-offs and sharp drops in cryptocurrency prices.
A highly correlated market
Meanwhile, the correlation between the cryptocurrency market and the Fed's policies has intensified in recent years. As cryptocurrencies gain maturity and become more integrated into the traditional financial system, their sensitivity to macroeconomic policies becomes more apparent. Institutional investors, who are now actively involved in the cryptocurrency market, closely monitor the FED’s decisions and adjust their strategies accordingly. This increased institutionalization has amplified the impact of FED policies on cryptocurrency prices.
To illustrate this point, let’s imagine a situation where the Fed unexpectedly announces a significant increase in interest rates. Investors, fearing an economic slowdown, might sell their risky assets, including cryptocurrencies, to invest in Treasury bonds, considered safer. This sell-off would trigger a sharp drop in cryptocurrency prices, generating panic in the market and exacerbating volatility.
This hypothetical scenario has materialized on multiple occasions in recent years. Surprise announcements from the Fed, whether about interest rate hikes or balance sheet reductions, have coincided with sharp drops in cryptocurrency prices. These events demonstrate how the uncertainty generated by the Fed’s actions can trigger adverse reactions in the cryptocurrency market, even if there is no direct connection to the underlying fundamentals of these technologies.
TRADE WITH STABLECOINSThe impact on inflation
In any case, let us remember that the Fed's main mission is to maintain price stability by controlling inflation. To do this, it uses tools such as interest rates. Raising interest rates makes credit more expensive, which reduces spending and investment, and eventually lowers inflation. However, raising rates too quickly or too high can slow the economy and cause a recession. Herein lies the complexity of the current situation: The Fed must balance the need to control inflation with the risk of damaging economic growth.
Inflation, defined as a widespread and sustained increase in the prices of goods and services in an economy, erodes the purchasing power of the currency and can lead to economic instability. The Fed, as the central bank, has the responsibility of keeping inflation under control and preventing it from getting out of control. To do so, it uses a variety of tools, including interest rates, bank reserve policy, and public communication. However, controlling inflation is a complex challenge that requires careful analysis of economic conditions and precise calibration of monetary policies.
Inflation in the United States is a serious problem
The Fed’s indecision on how to tackle inflation is creating uncertainty in the markets. Investors are unsure whether the Fed will be aggressive enough to control inflation or whether it will prioritize economic growth, even at the cost of higher inflation. This uncertainty translates into volatility and risk aversion, negatively affecting the crypto market.
The difficulty is that inflation can be caused by a variety of factors, including increased demand, supply shortages, and external shocks such as rising oil prices. The Fed must discern the sources of inflation and adjust its policies accordingly. Raising interest rates may be effective in controlling demand-pull inflation, but may be less effective in controlling inflation caused by supply shortages.
Furthermore, Fed policies have a delayed impact on the economy, meaning that the effects of current decisions may not be apparent for several months. This complexity makes the task of controlling inflation especially challenging in the current economic environment.
Crypto markets in free fall: Stablecoins and altcoins affected
It is now clear why the Fed's indecision has contributed to a notable decline in the crypto markets. Bitcoin, the largest and most well-known cryptocurrency, has seen significant fluctuations, and many altcoins have seen even steeper declines. Even stablecoins, which are designed to maintain a stable value, have experienced some volatility due to overall market uncertainty.
The fall in cryptocurrency markets is not only due to the FED's indecision. Other factors, such as increased regulation, hacks and frauds, and competition between different cryptocurrencies, have also contributed to volatility and uncertainty. However, the FED's monetary policy plays an important role in overall market sentiment and can amplify the effects of other factors.
INVITE AND WINAltcoins: Higher risk, higher volatility
Altcoins, being generally smaller and less established than Bitcoin, are even more susceptible to market volatility. Many altcoins have seen significant declines in recent months as investors have reduced their risk exposure and sought refuge in safer assets. Lack of liquidity in some altcoin markets can also exacerbate volatility, leading to sharp and sudden price movements.
Altcoin investing is inherently riskier than Bitcoin investing. Altcoins typically have a smaller market capitalization, making them more susceptible to price manipulation and illiquidity. Additionally, many altcoins are experimental projects with a high degree of uncertainty about their future. Altcoin investors should be prepared for the possibility of losing a significant portion or all of their investment.
Solana as an example
A clear example of this is the case of Solana (SOL). Despite being a promising blockchain with an active developer community, SOL has experienced considerable volatility in response to FED moves and general market conditions. This demonstrates how even solid projects can be affected by external macroeconomic factors.
The Solana case illustrates the importance of diversifying one’s cryptocurrency portfolio. Even if an investor strongly believes in the potential of a project like Solana, it is important not to invest too large a proportion of their capital in a single altcoin. Diversification can help mitigate risk and protect the portfolio against market volatility.
Investing in cryptoassets is not fully regulated, may not be suitable for retail investors due to high volatility and there is a risk of losing all invested amounts.
