The Federal Reserve or the Fed has been in controversy when it ceased its money supply expansion spree and begun the process of austere measures post COVID-19. Now let’s discuss who the Fed is, its role, and its involvement in the crypto industry.
Historical Context
Prior to 1907, a relatively weak financial structure in the USA found cheque credit very easily available in the market and financed speculative futures. The speculative excesses reached a climax in the Panic of 190? that was characterized by a series of bank failures triggered by unsuccessful ventures. Senior citizens within the business society, especially through top of the ranked J. P. Morgan, took their personal money to restore the financial situation.
This development was followed by the formation of the Federal Reserve, which was aimed at regulating the overall money supply in the system.
Following the calamities of the 1907 economic disaster the National Monetary Commission was established in 1910, which in turn birth the Federal Reserve in the year 1913. The Fed’s primary goal was to act as a central bank to rescue some troubled banking institutions, however, its functions have grown regularly to focus on providing government supervision and stability in the nation’s financial markets.
The Fed’s Role
The major one is the Federal Reserve which is the central bank of the United States of America that offers financial services, bank supervision and managing the monetary policy of the country. The FED is an independent organization that bears a dual mandate from Congress: to work towards full employment and to keep inflation low at about 2%.
Monetary policy and FOMC Here Monetary policy refers to the process by which the FOMC manages the money supply and interest rates while implementing the overall monetary policy.
Monetary policy is implemented by the Federal Open Market Committee and involves operations aimed at influencing several players in the circulation and availability of money. FOMC establishes the Federal Funds Rate which causes a domino effect on interest rates for loans and mortgages which in turn influences the over all economic activity.
Higher rates tend to have the effect of making people cut back on their spending thus inflation is dampened, on the other side, low rates have a tendency of making individuals borrow more and spend more.
Impact on Crypto
The Covid crisis led to a record $6 trillion explosion in global money supply and sent Bitcoin and other cryptocurrencies to new records. Nevertheless, to curb inflation that has been rising over the years the Fed commenced raising the Federal Funds Rate in 2022, at the same time, the cryptocurrency market started bearing a downward trend.
Banks in turn charge higher interest rates to the customers resulting in declined investment on assets which are considered risky in nature such as crypto.
Conclusion
It is therefore clear that policies made by the Federal Reserve poised a danger on the economy and therefore the crypto market. This not only assists the cryptocurrency investor’s in better understanding the Fed and its activities, but also provides data for future trends.
The impact of the federal funds rate on financial markets and thus on the crypto market remains significant as the Fed goes on with adjustments.
