By Nicolas Abington | Crescent City Capital Market Analyst Intern
The federal funds rate is a tool of the fed to apply monetary policy on the market by controlling short term circulation of the US Dollar on the market. The Fed is able to adjust the federal funds rate by issuing/buying US government-backed securities such as a treasury bill, note, or bond. In times of economic distress, the fed will sometimes lower the fed funds rate to make borrowing easier for the general populace hoping to result in an economic boost.
As many of you know, the Fed has officially set the federal funds rate to 0%. Such a low federal funds rate has not been seen since December of 2008 to help combat against the last great recession caused by the collapse of the housing market. The drop in the rates marked the maximum amount that the federal reserve can use this tool before pushing rates negatively or switching to printing money outright.
Before we talk about the effects that these have on cryptocurrency, the drop in the federal funds rate has had an effect on the 10-year treasury yield. After the rate cut took place over the weekend, the yield spread between the one month to the ten year has spread out in opposite directions. The data shows that market sentiment has an extremely high demand for government debt in the short term but less so in the future. To learn more about the characteristics of bonds to understand this phenomenon, here is a helpful resource.
So these two events can be catalyst for BTC and other cryptocurrencies in a couple of different ways. The first is that the treasury yields signaling high demand for short term government debt infer that investors are scared and they want to protect themselves from an overheated economy. As investors recognize the benefits of cryptocurrency, the treasury yields could act as a catalyst for cryptocurrency adoption. Second, the fed funds rate reaching zero causes a no-win situation for the US Dollar. The Fed can either push the rate to negative which is theoretical and extremely controversial or simply print more money which devalues USD. In all cases, alternative currencies would become more desirable in comparison to the US Dollar and should be focused on for the foreseeable future.