3. Inflation Control (The Main Objective) The primary reason for the "higher for longer" policy is the control of inflation. The Fed raises and maintains high rates to cool down the economy's demand. By making money more expensive, spending decreases, which reduces upward pressure on the prices of goods and services. If inflation persists above its 2% target, the Fed will refrain from cutting rates until it is confident that inflation has been tamed sustainably. In summary, the abstention from cuts and the "higher for longer" policy make money more expensive, slow down economic activity, cool inflation, and divert capital from high-risk assets to safer investments, exerting strong downward pressure on the growth and valuation of cryptocurrencies.
2nd PART 2. Pressure on Risk Assets Risk assets, such as technology stocks and especially Bitcoin (BTC), are directly affected by the Fed's policy due to two main mechanisms: Competition with Safe Investments: When interest rates are high, investors can earn attractive returns on "risk-free" or very safe assets (such as savings accounts or government bonds). This reduces the incentive to take the risk of investing in volatile assets like Bitcoin or stocks, which do not pay fixed returns. Money migrates from BTC to bonds. Discounting Future Cash Flows: Risk assets are valued based on their discounted future cash flows (or, in the case of Bitcoin, the expectation of future demand). When interest rates are high, the rate used to discount these flows is higher, which reduces the present value of such assets. The vulnerability of Bitcoin that you mention is clear: without the liquidity injection that low rates offer (cheap credit seeking higher-yielding assets) or without a strong specific inflow (like those from ETFs), the asset loses its main bullish catalyst.
๐ธ Impact of Monetary Policy "Higher for Longer" The Federal Reserve's (Fed) decision to refrain from cutting interest rates and maintain a "higher for longer" stance profoundly influences the entire economy, not just risk assets like Bitcoin, but also the cost of global money, consumption, investment, and the valuation of financial assets. The Fed's policy is essentially the main driver regulating the U.S. economy, and given the size and interconnectedness of the U.S., its effects are felt worldwide. 1. The Cost of Money and Borrowing Facing Credit: The benchmark interest rate (Federal Funds Rate) is the basis for the interest rates that commercial banks charge for loans (mortgages, auto loans, credit cards, business loans). Refraining from cuts means that credit remains expensive. This discourages borrowing and spending by both consumers and businesses. Affects Businesses: Businesses face a higher cost to finance their operations, expansion, and investment. This reduces their expected profits and, therefore, the value of their stocks. Companies with a lot of debt are particularly vulnerable. Global Impact (Capital Flight): If the Fed keeps rates high while other central banks lower or maintain theirs low, the U.S. dollar (USD) becomes more attractive. Global capital shifts toward USD-denominated assets (like Treasury bonds), as they offer higher yields. This can cause: Strengthening of the USD: Harms emerging countries by making their dollar-denominated debts more expensive and making their exports less competitive.
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