At 2 am Beijing time today, Federal Reserve Chairman Powell announced that the federal funds rate will be lowered by 25 basis points to 2% to 2.25%. This is the first time the Federal Reserve has cut interest rates since the birth of Bitcoin.
This rate cut will be of great significance for digital currencies such as Bitcoin.
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(Photo: Fed Chairman Powell)
You may ask, what is the relationship between the two?
First of all, what we need to understand is that most of the current transactions in digital currencies such as Bitcoin are linked to the US dollar anchor currency. Therefore, the impact of the US dollar on digital currency such as Bitcoin is undoubtedly huge.
So, let’s go back and find out what the Fed’s interest rate cuts and the opposite interest rate hike concept mean. What is the impact of interest rate cuts?
What is the Fed’s interest rate hike and interest rate cuts, and what is the impact?
1. What is the Fed rate hike?
The Fed’s rate hike means that the Federal Reserve System Management Committee decided to adjust the monetary policy after the interest rate meeting in Washington, and raised the federal funds rate. The basic purpose of the Fed’s interest rate hike is to control inflation and maintain the long-term growth of the total amount of money and credit in line with the long-term potential growth of the economy (the inflation rate target is about 2%).
2. What is the Fed’s interest rate cut?
Contrary to the concept of raising interest rates, when the inflation rate is too low, the Fed will push the inflation rate through interest rate cuts.
How to achieve interest rate hike and interest rate cuts? The Fed relies on increasing or decreasing the amount of currency in circulation on the market.
That is to say, if there is less money circulating in the market, then the rate hike will be realized. If there is more currency in circulation, then the rate cut will be realized.
There are many tools that can be used, but mainly two:
- Federal funds rate;
- IOER interest rate;
After the interest rate cut falls to a certain level (close to 0), we will usher in another concept quantitative easing (QE), and quantitative easing can also be described as indirect printing of banknotes.
Simply put, the impact of interest rate cuts will be far greater than raising interest rates.
3. Why is the interest rate cut?
According to the statement released by the Federal Reserve, the interest rate cut is mainly due to the global economic weakness and the uncertainty caused by trade friction, and its interest rate cut is more biased towards “preventive”. The goal of this operation is to force pull. Raise the economy to avoid a short-term economic crisis. Another kind of recession rate cut is a signal confirmation of the economic crisis.
The impact of interest rate cuts on Bitcoin
As we mentioned above, the interest rate cut will increase the amount of dollars circulating in the market. If we take a certain XX coin and BTC as a transaction pair, suppose the founder of the XX coin decides: “We want to increase the number of XX coins circulating in the market” (This may be achieved by means of unlocking, etc.), then the XX currency will have a large probability of trading against BTC.
By the same token, the increase in the dollar flow in the market, the probability of the dollar to BTC trading rate will also fall, that is, the BTC will rise against the dollar.
In fact, according to the data provided by qkl123.com, Bitcoin has indeed risen by a few percentage points after the Fed announced a cut in interest rates, and has now returned to $10,000.
Of course, the current rate cut by the Fed is not to say that the economic crisis has occurred, so in theory it will not lead to the crazy rise of Bitcoin, but this is indeed a very important signal.
And once the global economy continues to deteriorate and fall into crisis, whether Bitcoin designed for this purpose can really become Noah's Ark remains to be verified by the market.
What do you think?