It was a nail-biting day for the crypto world. At 8:00 PM Dutch time, investors globally were on the edge of their seats. The reason? The U.S. Federal Reserve (the Fed) announced a crucial interest rate decision with significant implications for financial markets.
Fed Announces Rate Decision #
The decision is in: the Fed is lowering the interest rate by 25 basis points, equivalent to 0.25 percentage points. This brings the policy rate to a range of 3.5 to 3.75 percent. In practice, this means borrowing becomes slightly cheaper and the Fed is giving the economy a small nudge.
The financial watchdog’s decision comes as no major surprise. Earlier this week, the CME FedWatch Tool estimated the probability of a rate cut at 87 percent. Moreover, this is the third rate cut of the year.
A rate cut partly determines how investors operate. A cut makes saving less attractive and borrowing cheaper. Consequently, investors are quicker to seek returns in riskier markets like crypto. This channels more money towards bitcoin, ethereum, XRP, and other cryptocurrencies.
The Fed’s announcement is therefore positive news for the crypto market. The exact effect on crypto prices is yet to be seen. The last time the Fed lowered rates, on November 7, the bitcoin price barely moved. All the spectacle took place ahead of the announcement.
How Did the Fed Reach This Decision? #
The Fed based its decision on several key figures and reports released last week. The documents included data on unemployment and the number of job openings.
Unemployment data is important in determining policy because it says a lot about the strength or weakness of the U.S. economy. When more people are working, more money comes in. More money is spent and companies are quicker to invest.
Another scenario on the labor market also occurs. When unemployment rises, it is often an early warning sign that the economy is cooling. This means households are more likely to tighten their belts, companies are slowing down, and a recession is approaching.