Interest rates impact all areas of the economy, finance, and commerce. Securities, stock markets, and emerging cryptocurrency markets are no exception.
Interest rates influence all economic, financial, and commercial sectors. Recently, the U.S. Federal Reserve has raised interest rates over 65 times in less than two years—an extraordinary and unprecedented measure. Examining the impact of this decision on capital markets, housing, loans, debt, and digital assets is a critical topic of discussion among experts.
Table of Contents
Introduction
Inflation is the economy’s thermometer. Extreme increases or decreases in inflation signal disruptions threatening economic stability. Managing such economic “fevers” requires coordinated measures, primarily using tools like interest rate control. Interest rates determine borrowing costs and the returns on bank deposits, influencing how individuals view their financial future, especially during retirement.
The most important tool governments and central banks use worldwide is interest rate control.
In recent years, cryptocurrencies have become a novel pillar in finance. As they face their first major economic crossroads in a volatile world, the question arises: how will cryptocurrencies respond to large-scale, fundamentally economic decisions rather than regulatory actions? This article explores the relationship between interest rate changes and various markets, concluding with an analysis of their impact on digital assets.
What Is Inflation, and How Does It Occur?
Inflation has a straightforward definition: it refers to the rise in the general level of prices—usually within the framework of a specific basket of goods—over a certain period. Inflation, in a way, reflects the condition of an economic system at various social levels, from villages and cities to countries and even the international sphere. The rise in price levels incentivizes producers and innovators to strive for greater profits; otherwise, motivations diminish, leading to stagnation. However, if inflation remains limited, it can be beneficial. Economists generally agree that, from a broad and simplified perspective, single-digit inflation is appropriate and an indicator of relative economic health. More precisely, inflation’s productive and beneficial range lies between 1% and 3%. Higher figures indicate existing problems, although inflation rates up to 10% are not particularly alarming. Concern begins when inflation surpasses 10% and remains at that level for over a year. In other words, inflation is the economy’s thermometer. Just as a human body temperature of 36.1°C to 37.2°C indicates health—and a temperature of up to 38°C might suggest mild sensitivity or temporary elevation due to high activity in a warm environment—temperatures above 38.1°C signify serious illness.
Inflation always arises when the income and expenditure of an economic system are imbalanced. This occurs when there is no equilibrium between the scale of incomes, available money, and assets on one side and expenditures and costs on the other. Imagine a city where everyone has sufficient money, say one million tomans, to cover their basic needs. Suppose an additional 100,000 tomans is suddenly given to every resident as a reward. Without any real economic or productive activity taking place, new money has been created, encouraging people to spend more. Consequently, the existing money exceeds the available goods and services, or in other words, money’s value and purchasing power diminishes. This results in increased demand, and prices rise to meet these new demands. If this type of reward-like distribution of money does not stop, the issue of inflation emerges. Temporary events, such as wars or pandemics, might have short-term effects, and inflation might even be deliberately induced to stimulate production. Nevertheless, the primary source and regulator of inflation lies in the imbalance between government revenues and expenditures and the central bank’s policies. This is because the creation, destruction, and control of money, along with the management of public expenditures, are in the hands of these institutions.
What Is the Interest Rate?
Interest rates are pivotal in shaping borrowing, saving decisions, and economic dynamics.
Interest rates represent the cost of borrowing money. For lenders, they serve as compensation for the risk of lending and the opportunity cost of not using funds elsewhere. Higher rates mean borrowing is more expensive, discouraging loans, while lower rates make borrowing affordable, potentially fostering investment and economic growth.
On the other hand, interest rates influence savings. Banks reward depositors with interest for allowing the use of their funds. These returns may compound over time, offering additional benefits to savers.
Interest rates apply to both individual and institutional borrowing and saving. Central banks often regulate interest rates at the macroeconomic level, affecting the rates commercial banks offer. For example, banks may lend to each other or borrow from central banks to balance their accounts, with government bond purchases also factoring into this ecosystem. Central banks, like the Federal Reserve in the U.S., set benchmark interest rates that impact the broader financial system. Ideally, interest rates align with inflation levels to maintain economic stability. Independent and robust central banks avoid micromanaging lending or deposit activities but influence the market through benchmark rates.
The Relationship Between Interest Rates and Inflation Control
Unregulated, unsupported money that is neither removed from circulation nor backed by a plan to do so equates to inflation. In such conditions, people prefer borrowing to saving, as future money loses value compared to today. This dynamic leads to a high circulation velocity and volume of money, perpetuating inflation. The first step in addressing inflation is to reduce government spending, budget deficits, and the imbalance of central and commercial banks. However, it is also essential to tackle surplus money. This requires policies and incentives to reduce the money supply and curb its rapid creation. The most critical financial tool for this purpose is the interest rate. Notably, interest rates also stimulate productive inflation, driving economic growth. Cheaper loans encourage borrowing and financial activity, creating a positive economic cycle. However, the relationship between interest rates and inflation is complex, non-linear, and influenced by fiscal policies, global economic conditions, and supply-demand dynamics.
How Interest Rates Affect Inflation
- Monetary Policy: When inflation rises, central banks may increase interest rates to discourage borrowing and spending. Expensive loans deter consumers and businesses from taking on new debt, reducing overall demand for goods and services. This can help alleviate inflationary pressures and cool down an overheated economy.
- Savings and Investment: Higher interest rates make savings more attractive, encouraging individuals to save rather than spend. With increased savings, demand decreases, potentially reducing inflationary pressures.
- Currency Value: Changes in interest rates also affect currency values. Higher rates attract foreign investors seeking better returns, increasing demand for the local currency and strengthening its value. A stronger currency can lower import costs, further curbing inflation.
Why U.S. Interest Rate Changes Matter Globally
Questions often arise: Why do U.S. domestic economic decisions affect the global economy? or Why do most major global corporations, even without a U.S. base, aim to list on the New York Stock Exchange? The reasons are clear. As the world’s leading economic, political, and military power, U.S. monetary policy—especially Federal Reserve interest rate changes—has a global ripple effect. Since the dollar became the dominant currency in international trade after World War II, U.S. economic policies significantly influence global markets. More than 18 countries, including the European Union, often adjust their interest rates in tandem with the U.S., such as the UK, many Commonwealth nations, China, and Saudi Arabia. Consequently, the U.S. serves as the ideal barometer for understanding the relationship between interest rates and market behavior.
Recent U.S. Interest Rate Trends
President Joe Biden’s administration inherited an economy recovering from the COVID-19 pandemic, marked by recession and deflation in certain sectors. While the initial economic remedies seemed straightforward, Russia’s invasion of Ukraine altered the global landscape. This conflict disrupted industries like energy and food (notably wheat, corn, and sunflower products), triggering inflation rates exceeding expectations.
In response, the Biden administration raised interest rates several times within an unprecedentedly short period. Rates climbed from approximately 0.08% in March 2022 to 5.33% in July 2023, where they remain today. For perspective, following the 2008 financial crisis, interest rates dropped to near zero and didn’t exceed 0.1% until 2015. During Donald Trump’s presidency, rates rose to 2.41% as part of efforts to strengthen the U.S. dollar and attract investment but returned near zero during the COVID-19 pandemic to ease loan and debt costs.
Historically, interest rates have averaged around 3% since the 1980s, with only brief periods, such as the pre-2008 financial crisis, reaching 5%. This makes the current 5%+ rate particularly noteworthy in the 21st century.
There is a strong correlation between interest rates and the behavior of financial markets.
The Relationship Between Interest Rates and Investment Markets
The correlation between interest rates and stock markets, as well as their impact on the prices of securities and investment decisions, is complex and nonlinear. While a general understanding of the patterns and approximate behaviors can be developed, the dynamics are influenced by numerous factors. It is important to note that in economics, we often deal with correlations (not causations), as the relationships are not always clear-cut. Despite this complexity, there is a strong correlation between interest rates and the behavior of financial markets.
When a company’s growth or profitability declines—often due to higher debt costs or reduced revenue caused by fluctuations in interest rates—the stock price tends to fall. A decline in stock prices across several companies can negatively impact the entire market, reducing the appeal of stock ownership. However, the financial sector may benefit from interest rate changes.
Experts suggest an inverse relationship exists between stock market prices and interest rates: as interest rates rise, stock prices generally fall, and vice versa. For example, government bonds become more attractive when the U.S. Federal Reserve increases interest rates because they offer higher returns with minimal risk. As a result, investors may shift funds from equities to government bonds, reducing stock demand and prices. This shift can also make borrowing more expensive for governments and businesses, leading to the issuance of higher-yield bonds.
Interest rate changes also influence investor psychology and market expectations. Announcements of rate hikes may lead businesses and consumers to adopt cautious spending habits, potentially causing capital outflows from equity markets. Conversely, rate reductions often encourage spending and make investments more appealing, increasing stock prices. However, market reactions may differ from predictions if market expectations diverge from the Federal Reserve’s actions.
The economic cycle stage and broader domestic and international economic, commercial, or political conditions also play crucial roles in market responses to interest rate changes.
During periods of economic slowdown, declining interest rates may not sufficiently revive weak economic activity (even with negative rates), leading to continued stock market downturns or stronger growth drivers. Conversely, near the peak of economic booms, rate hikes by the Federal Reserve often have a limited impact on industries like technology and entertainment, which may continue to perform well.
During periods of economic slowdown, declining interest rates may not sufficiently revive weak economic activity.
Impact of Interest Rates on the U.S. Stock Market
As of July 2023, U.S. interest rates stand at 5.33%, a 65-fold increase since the Biden administration began. In September 2023, the S&P 500 index dropped by approximately 4.2%, marking its worst performance since December 2022. This decline can be attributed to persistent inflation and anticipated higher interest rates.
While U.S. stock indices performed well in the first seven months of the previous year, growing by 19.5%, they experienced a nearly 6% decline in August and September. Notably, the technology sector demonstrated resilience during this period, maintaining relatively steady performance despite market fluctuations.
The Biden administration and the Federal Reserve have implemented several measures to combat inflation, including increasing short-term interest rates and reducing bond holdings. These actions aim to temper economic growth without triggering a recession, as Biden’s tweets and campaign messages emphasized.
However, persistent inflation, geopolitical conflicts like the Ukraine war, and recent escalations in the Middle East between Hamas and Israel suggest that interest rates may rise further. While higher rates discourage investments and increase borrowing costs, they also elevate public concerns about economic challenges, potentially undermining Biden’s political support.
Experts predict that additional rate hikes by the Federal Reserve will likely slow economic growth and reduce corporate earnings. Some forecasts even anticipate declines in technology stock valuations, given the sector’s reliance on investments in emerging technologies like AI, which often entail high initial costs with delayed or uncertain returns.
Interest Rates and the Real Estate Market
The real estate market holds significant economic, political, and social importance. Consequently, interest rate changes announced by central banks affect mortgage rates and broader financial and investment dynamics. However, interest rates are not the sole determinant of real estate price fluctuations. Factors like capital flows, supply and demand, and expected returns also play critical roles and may occasionally outweigh interest rates in importance.
Real estate evaluations typically rely on an income approach, which forecasts property income, deducts expenses, and calculates the net operating income (NOI). Subtracting overhead costs and ancillary expenses (e.g., insurance and agent fees) determines the net cash flow, which is crucial for property valuation. Interest rate changes influence financing costs and impact overall property costs and final valuation.
Financing costs are not limited to the cost of obtaining a mortgage and its interest rate; other factors also influence these costs, and interest rates can impact them significantly.
Capital flows driven by interest rates significantly impact public access to financial resources for real estate investment. When interbank lending rates decrease, more capital becomes available, stimulating demand for real estate and vice versa. These changes in capital flows and accessibility also affect the supply-demand dynamics of real estate, altering asset values.
Interest rates also influence discount rates, representing the required return rate for investors. These rates include a risk premium added to the risk-free rate of return. The corresponding risk-free rate is typically the yield on U.S. Treasury bonds. When interest rates rise, the required investment returns increase, initially driving property prices higher but subsequently reducing demand. Over the medium term, this results in either a decline in real estate values or a stagnation in the market. Conversely, when interest rates fall, property values tend to increase.
Moreover, risk premiums also increase during periods of instability in credit markets or when investors anticipate greater price volatility or rising risks. This, in turn, exerts downward pressure on property prices, with interest rates naturally playing a role in these fluctuations.
Effects of Interest Rates on the U.S. Housing Market
Since the start of rate hikes, the U.S. housing market has grown rapidly. The average home price rose from $329,000 in 2020 to $431,000 by 2022—a 31% increase—before peaking at $479,000 in December 2022. Improvements in the stock market brought prices down to $416,000 by mid-2023. However, current conditions mirror December trends, with mortgage rates exceeding 7%, limiting capital flows into real estate and stabilizing or reducing prices. While rate hikes in early 2023 aimed to stabilize housing inflation, external factors and global crises continue to undermine these efforts. Further interest rate increases may be necessary to curb housing inflation, though they could temporarily dampen market confidence and exacerbate economic uncertainty.
The Relationship Between Interest Rates, Debt Markets, Loans, and Liabilities
We have generally examined securities and noted an inverse relationship between interest rates and bond prices. However, the debt and liability market has its specific dynamics. This inverse relationship exposes investors to interest rate risk, which refers to potential fluctuations in investment value due to interest rate changes. Recognizing that the relationship between bond prices, loans, and interest rates isn’t always straightforward or immediately impactful is crucial. Additional factors must be considered when focusing specifically on the debt market, revealing the importance of market dynamics. Consequently, the bond and debt market is more complex than initially perceived and can be influenced by various factors, including:
- Price Sensitivity of Bonds and Liabilities: The sensitivity of bond prices to interest rate changes is measured by their duration. Long-term bonds are more sensitive to interest rate changes, meaning their prices fluctuate more in response to rate changes. Conversely, short-term bonds exhibit lower sensitivity. This distinction significantly alters long- and short-term investment strategies during periods of market upheaval, such as now, when the overall supply-demand behavior in the bond market has shifted dramatically.
- Yield Curve Dynamics: The yield curve illustrates the relationship between interest rates (or yields) and bond maturities. Typically, the yield curve slopes upward, indicating that long-term bonds offer higher yields than short-term ones. However, the curve can flatten or invert, as is currently the case, where short-term bonds yield more than long-term ones. Changes in the yield curve shape provide insights into market expectations for future interest rate changes and economic conditions.
- Inflation Expectations: Inflation expectations significantly influence bond prices. When investors anticipate higher inflation, they demand higher yields to compensate for reduced purchasing power, leading to lower bond prices and higher interest rates. Paradoxically, if rising interest rates induce uncertainty, even relatively, they may elevate inflation expectations, triggering a self-reinforcing cycle of rate hikes.
- Credit Risk: Beyond interest rate risk, bond prices are also affected by credit risk. Entities with lower credit ratings or higher default risk often offer higher yields to attract investors. This dynamic can give rise to the perception that these entities are “sacrificing” future expected returns to secure current investments, effectively gambling on their future viability.
- Market Demand: Market demand for bonds is another key factor influencing prices. Economic conditions, investor sentiment, and global financial trends collectively affect overall bond demand. Higher demand can drive up prices and lower yields, whereas reduced demand has the opposite effect.
Effects of Interest Rate Changes on Debt Markets
As previously mentioned, the debt market initially experienced growth during the Trump era but then entered a clear downward trend for reasons already discussed. This shift was natural, considering the end of Trump’s trade wars with China and the reduction in interest rates during the latter part of his presidency. However, it would have inevitably caused problems, even if COVID-19 had not emerged.
In practice (due to time constraints, controversies, or other issues), Trump failed to boost economic capacity genuinely. Major buyers of U.S. debt securities were reluctant to step in despite rising interest rates, largely because the trade war with China had driven the country out of the ranks of primary buyers of U.S. government debt. This outcome, which Trump appeared to view as a strategic objective, stemmed from his belief that China’s involvement in U.S. debt markets constituted a form of influence. As a result, it was entirely predictable that the U.S. government would soon face difficulties in raising funds and would need to increase interest rates. With the additional economic disruptions caused by COVID-19, the Federal Reserve had little choice but to raise interest rates rapidly. This, in turn, caused a sharp upward trend in both small and large loans while capital flows shifted toward gold, energy, and debt securities.
When interest rates were below 0.1%, debt securities offered yields approximately one percentage point higher. Currently, however, their returns closely track interest rates. Long-term debt instruments have become particularly attractive as there is hope that interest rates will return to below 2% within the next two to three years. Thus, substantial returns await bondholders at maturity. On the other hand, demand for loans has declined, while deposits are on the rise, which could slightly reduce the overall appeal of this market.
Interest Rate Changes and Cryptocurrency Markets
It was widely expected that the digital asset market would react significantly, predominantly downward, to rising interest rates. However, no clear downward trend was observed among major cryptocurrencies. For instance, Bitcoin has gained momentum and initiated an upward trend during this period, surprising a substantial number of financial experts and analysts. Amid this, some analysts succeeded in providing insightful analyses.
In fact, various methods, mechanisms, and factors can affect cryptocurrency prices through interest rate changes. While a correlation exists, it is difficult to define or uncover a direct causal relationship with certainty. This ambiguity stems from the nature of such phenomena and markets.
As a starting point, the opportunity-cost perspective helps explain why a general decline in the cryptocurrency market was anticipated. Cryptocurrencies like Bitcoin and others operating on Proof of Work (PoW) protocols are not tied to interest rates like fiat currencies, nor do they incur costs for interest payments. Consequently, when interest rates are low, the crypto asset market becomes more attractive to investors, akin to other high-risk assets with potentially higher returns. This leads to increased prices for such cryptocurrencies. Conversely, when interest rates are relatively high, the appeal of these digital assets may decline as the guaranteed returns from higher interest rates become more attractive.
However, this analysis is incomplete, and many analysts may overlook the other side. Cryptocurrencies like Ethereum, which operate on Proof of Stake (PoS) protocols, can partially offset the impact of rising interest rates. With this in mind, the blockchain market as a whole may resist interest rate volatility and behave somewhat independently of such events. For example, a diversified portfolio of tokens or instruments like ETFs composed of various digital assets could maintain value unaffected by interest rate changes.
Cryptocurrencies operating on Proof of Work (PoW) protocols are not tied to interest rates like fiat currencies, and they do not incur costs for interest payments.
Another factor to consider is risk appetite or the willingness to take risks. It is a familiar phenomenon that when central banks raise interest rates to cool down overheated economies or curb inflation, certain investors become more willing to take risks with at least part of their capital. Such measures signal tighter monetary policies, reduce financial market risks, and slow economic growth. As a result, investors may not expect substantial profits from broader markets for some time. High-risk tolerance is inherently linked to cryptocurrencies, and this shift in investor sentiment can impact the demand and price of digital currencies.
Additionally, the role of inflation expectations in the relationship between interest rates and cryptocurrency prices is significant. Central banks often adjust interest rates in response to inflation expectations. This adjustment serves as a signal for traders and participants, indicating higher future inflation. Consequently, investors might turn to cryptocurrencies, particularly Bitcoin, as a hedge against inflation and a means of preserving asset value. Such conditions could increase demand for digital currencies. However, if the central bank succeeds in reducing inflation, demand for cryptocurrencies may subsequently decline.
Statistical analyses based on long-term data suggest a relationship exists between Bitcoin prices and nominal and real interest rates, especially those announced by the Federal Reserve. While the potential impact of interest rates on cryptocurrency prices is acknowledged, factors such as digital currencies’ flexibility, global nature, and the varying effects of interest rates in different countries and international transactions must also be considered to estimate a more realistic impact.
Finally, some cautious analysts who still believe in the crypto market’s growth potential interpret all the arguments and market conditions as suggesting that capital has shifted away from crypto and into sectors that benefit from rising interest rates. As noted, these sectors often offer more reliable and lower-risk returns.
Recent Major Events in the Cryptocurrency World
It may be necessary to consider other factors during the current period. First, for some time, regulatory discussions, legislation, extensive investigations by various commercial, regulatory, and legal entities across different countries, as well as lawsuits against various projects in the digital assets and blockchain space, have caused public trust in cryptocurrencies to decline slightly, resulting in less market growth than expected. In fact, this issue should be prioritized over interest rates.
Another issue is the impact of wars and military conflicts, such as those in Ukraine and the Middle East, as well as simmering disputes like the Taiwan issue or North Korea’s aggressive cyber activities. These have pushed investments toward physical assets like gold. Additionally, concerns about cryptocurrencies being misused for hidden transactions—such as funding entities involved in conflicts (especially adversaries of the U.S.)—have decreased public trust and increased governmental pressure on crypto projects and exchanges. This situation may prove more impactful than interest rate changes.
However, two significant events related to cryptocurrencies could alter the correlation between Bitcoin and interest rates. The first is BlackRock’s recent achievement: obtaining approval to launch a Bitcoin ETF on the New York Stock Exchange. Similar ETFs already exist in Canada and Europe, and efforts are underway for Ethereum. When gold ETFs were introduced in the mid-2000s, they led to a massive influx of capital into gold markets—a scenario expected to repeat for Bitcoin and blockchain. This development could better align financial markets with cryptocurrency markets and establish cryptocurrencies as assets resilient to inflation and typical market fluctuations. It may also stabilize the volatility in digital asset markets. As a result, Bitcoin might behave like gold concerning interest rate changes but could outperform gold due to fewer logistical and legal constraints and greater transparency.
The second event is Bitcoin’s halving process, which occurred on April 19, 2024. Every four years—or more precisely, after mining 216,000 Bitcoins—the mining reward is halved.
This process is designed to prevent internal inflation in blockchain systems (and similar blockchains) and has other benefits, such as:
- Regulating competition among miners and managing network load.
- Preventing monopolization of mining processes and thus mitigating the risk of a 51% attack by reducing mining incentives and increasing attack costs after each halving.
- Aligning Bitcoin’s value and its mining with market dynamics and real-world conditions.
Previously, it was explained that due to the proof-of-work algorithm, Bitcoin and similar cryptocurrencies are not directly linked to interest rates but have an indirect correlation. Interest rates influence Bitcoin mining in two main ways: Funding Needs: Miners require capital to establish or upgrade mining facilities. Halving reduces incentives and increases the expected return threshold, while high interest rates make funding expensive, temporarily slowing mining activities. However, since Bitcoin demand is multi-faceted and not solely dependent on interest rates, decreased mining may lead to higher prices, motivating miners to rejoin. Energy Costs: Interest rates indirectly affect energy prices, often inversely. Higher interest rates could make mining more economically viable through this channel. Therefore, the proximity of halving and rising interest rates may not significantly impact Bitcoin mining but could act as a positive incentive during other periods.
Correlation Between Stock Markets and Cryptocurrencies
One major factor influencing stock and cryptocurrency markets is their correlation. Studies show such a correlation exists, primarily shaped by how financial markets interact with cryptocurrencies rather than inherent similarities between the two. For instance, when publicly traded companies allocate part of their investments to cryptocurrencies or hold token assets, the two markets become directly interconnected.
Cryptocurrency markets, being nascent, often face price drops and lower trading volumes due to public misunderstanding and lack of awareness. However, as understanding grows, digital asset markets expand. Consequently, cryptocurrency prices now fluctuate based on factors affecting traditional investments, such as economic conditions, regulatory actions, and investor risk appetite.
This relationship will deepen significantly when various financial instruments, including ETFs backed by cryptocurrencies, are fully integrated into traditional securities and stock exchanges. For example, the Bitcoin ETF has already been implemented, potentially transforming the relationship between the two markets from a mere correlation to a strong, direct connection. Such developments enable blockchain-based financial tools to find their place as robust mechanisms resistant to fluctuations caused by traditional economic factors, such as interest rates. This connection could empower both markets to grow and act as a lever for capital allocation and even interest rate adjustments.
Such developments enable blockchain-based financial tools to find their place as robust mechanisms resistant to fluctuations caused by traditional economic factors, such as interest rates.
Final Thoughts: When Will Interest Rate Hikes Stop?
Answering this question is almost impossible, but it is the conclusion of this article. Many believed that when the Federal Reserve announced its new 5.33% interest rate in October 2023, it would remain stable for at least a few months and potentially increase further if necessary, given that the economic and political variables on the table still hadn’t cooled down the overheated economy.
Even if it doesn’t decrease, the U.S. government needs prolonged stability at the current interest rate level to signal that the situation is under control and to present the economy as being ready for recalibration. There was some optimism that this stability was achievable, as many countries appeared more inclined toward resolving or finding a new equilibrium in the conflict between Russia and Ukraine, albeit slowly. Additionally, global energy markets stabilized post-Russia’s invasion, reducing global dependency on Russian oil and gas. This left domestic U.S. concerns as the primary unresolved issue. However, the world had other plans.
The outbreak of the Hamas-Israel conflict, accompanied by Israel’s prolonged and intense military response with no signs of resolution, has caused turmoil in energy markets and raised global inflationary expectations. Furthermore, Israel’s influential lobbies and supporters in the U.S., which are powerful agenda-setters, have lost trust in the current administration’s governance. Many Western politicians, given Israel’s importance and influence, have now deprioritized the Ukraine conflict in the current climate. As a result, reaching an equilibrium or applying pressure on the conflicting parties in Ukraine does not appear to be on anyone’s agenda, allowing Russia more room to maneuver and buy time.
This combination of factors and related intricacies led the Federal Reserve to approve, announce, and implement a new interest rate within less than a month. Given the current conditions, most analysts believe that while the interest rate has remained at 5.33% for several months, only the U.S. presidential election has prevented the Biden administration from raising it further. Otherwise, the circumstances remain conducive to higher rates.
Even if a ceasefire in Palestine and Gaza is achieved quickly, tensions among the involved governments are likely to persist for an extended period. This would keep inflationary expectations high and increase investment and trade costs internationally. Even the most optimistic analysts do not expect to see a downward trend anytime soon. It is worth noting that the average interest rate over the past 30 years has been below 3.5%, whereas it is now around 5%. This hints at alarming conditions such as double-digit inflation—both expected and actual—for the first time in 40 years, an influx of powerful and potentially disruptive capital into the U.S., and a temporary reduction in demand and supply for government bonds.
At this point, we must wait and observe how such tensions affect markets, especially cryptocurrencies. As most analyses suggest, will the market’s growth halt or decline with capital continuing to flow toward safer, higher-yield bonds? Or will digital assets carve out a niche as a reliable alternative? The only option is to wait and watch the unfolding events and circumstances.
