Why does the Fed rate affect the price of Bitcoin? How is inflation and unemployment in the United States related to cryptocurrencies and why do they pay attention to this?

The rapid development of the crypto market and the growth of its capitalization in recent years have attracted not only new users, developers, unique technological solutions, ideas, but also interest from traditional financial organizations.

Bitcoin, created by an anonymous developer known under the pseudonym Satoshi Nakamoto, as a response to the 2008 financial crisis and the imperfection of the global monetary system, is increasingly intertwined with it.

A striking example of this symbiosis is the bitcoin-based exchange-traded funds (ETFs) launched in the United States.

The ideological contradictions of the two alternative systems do not prevent the markets from complementing each other. However, this development has brought not only benefits to the cryptocurrency market, or at least parts of it, but also dependence on the traditional financial market.

Since the largest financial market in the world is located in the United States, and the dollar is undoubtedly the largest fiat currency in the world, the influence of American monetary policy promoted by the Federal Reserve System (FRS) has been transferred to the crypto market.

The Fed's rate.

The base rate of the Federal Reserve System (FRS) is the lending rate used by banks to provide short—term loans to each other.

Modern US monetary policy assumes that the rate is the main instrument for monitoring the state of the entire financial system.

Any rate changes affect not only the banking sector, but also the country's economy as a whole, the investment climate, stock and other trading markets, including the cryptocurrency market.

When the interest rate is low, it is easier for banks to provide loans to the public. Money is actually becoming cheaper and more accessible. Their number in the economy is growing, which can lead to higher inflation. The rate reduction process is defined as an easing policy.

A high rate means less availability of money. Loans are becoming more expensive, the influx of new money is slowing down, and economic activity is declining. This policy aims to reduce the rate of inflation growth. The process of raising or raising interest rates is defined as a tightening policy.

The Fed's base rate itself is not rigid for the banking sector — it is the target value that the Federal Reserve strives for in its monetary policy.

For example, if the real market rate is 3% and the base rate is set at 5%, then the Fed starts withdrawing money from the market by selling assets until the market rate reaches the target level. That is, it tightens the situation in the lending market.

In a scenario where the base rate is set at 3% and the real rate is at 5%, the Fed buys assets from the market by injecting money, easing conditions for the banking sector.

Why does the rate affect stocks and cryptocurrencies?

The investment climate in trading markets, as well as the sector of the real economy, tend to spend more and take more risks in conditions of soft monetary policy, that is, low rates and cheap available money.

Conversely, with tightening conditions, when access to cheap money is difficult, trade markets and the real economy are looking for stable income and savings options rather than increased spending.

When it comes to financial markets, it is common to distinguish assets into two main types: risky and risk-free.

Risk—free assets are fixed income assets of the type of government bonds. Risky assets are assets without fixed returns by type of stocks or commodities.

At times of tightening monetary policy and economic slowdown, investors tend to look for safe options for their money to save their funds, that is, risk-free ones.

When money is cheap in the markets and economic activity is growing, market participants tend to take higher risks by investing in company stocks, commodities, and other assets, including cryptocurrencies.

Thus, the Fed's rate can affect the prices of stocks and cryptocurrencies, which are risky assets without fixed returns, in which it is not customary to invest in a broad sense at times of market stress and financial crisis.

What other macro data affects bitcoin?

The Fed's rate decision is made based on a set of economic data, including inflation rates, unemployment rates, business activity indicators, and GDP.

This means that the publication of updated data on inflation and unemployment, for example, for March, may prompt the Fed to change the base rate at the April meeting.

If the inflation rate has decreased, as well as the unemployment rate, then the markets may assume that the Fed will cut the base rate soon. This means an easing of monetary policy and, as a result, an increase in economic activity.

With this logic, investors begin to invest in risky assets, expecting an increase in company revenues and an increase in stock prices in general. With more negative economic indicators, investors tend to act in the opposite way.

Hence the increased interest in the release of new data and the speeches of representatives of monetary regulators like the head of the Federal Reserve. Any data, words and events can indicate to investors a change in monetary policy, which is expected to have an impact on quotes.

Do not forget that the market in the broadest sense is a collection of many different opinions and data. Simple correlations and seemingly logical arguments of some players may seem counterintuitive to others.