The United States Federal Reserve (abbr. US Fed) controls the amount of money in the markets, and this money either supports or restricts the growth of cryptocurrencies. During different scenarios in the market, the supply of dollars is controlled in different ways, leading to different situations that impact crypto holders.
This article explains the working of interest rates from the view of crypto markets and helps readers understand why Federal Reserve rates are so critical for the markets.
The Federal Reserve’s Role in Shaping Cryptocurrency Markets
The US Federal Reserve and its Policy Rates
The United States Federal Reserve System (often called the US Fed) controls the supply of U.S. dollars. When inflation greater than 2% hits the US economy, the supply is restricted, and when inflation cools down below 2%, more money is released into the markets to support growth.
Do you know, these governments have accumulated a lot of crypto?
During inflation, the money supply is restricted by increasing the interest rates. Higher interest rates mean that more people would prefer to invest in bonds rather than spending or investing in stocks and crypto. This step also makes loans more expensive and, in return, makes people spend less.
Opposite to this, during the period of low inflation (or recession, i.e., inflation<0%), more money is released into the economy to make loans cheaper. More people taking credit to start a business or for consumption increases the money supply in the economy. As interest rates are low, investors find it more rewarding to invest in stocks and crypto rather than in low-interest bonds.
Brief Overview of The Fed-Crypto Linkage
The US Fed is responsible for managing the US Dollar and the finances of the US Government. Since the US Dollar is the global foreign exchange reserve currency for most countries, it gives the US Federal Reserve certain powers and abilities to control global trade, economy, and money flows.
This is why USD-based stablecoins are the most popular in the crypto markets. They strike a close resemblance to the US Dollar in the minds of their holders. As a result, more than 96% of global stablecoin volumes are based on the Dollar.
Finally, since the crypto markets use stablecoins as liquidity, the market dynamics in crypto depend directly on these stablecoins depends directly. This is also the reason why crypto markets cheer a rate cut, which just increases this liquidity in the markets.
US Fed Controls The US Dollar
The United States Federal Reserve is the body responsible for the U.S. monetary Policy. The body is made up of 16 Federal Reserve Banks, which control the Board of Governors, and this Board of Governors is headed by the Federal Reserve Chairman.
The Federal Reserve directly impacts the whole world, and the crypto markets too. This is because the Fed’s policy decides how many dollars will be in the markets at any given time.
When the US economy slows down, the Federal Reserve prints more US Dollars or lends them to the banks from its reserves. Excess supply of money makes loans cheap, and hence more people take those loans or buy with credit.
This is how the money released by the Federal Reserve enters the economy and finally into investment instruments like cryptocurrencies.
The US Dollar Backs The Stablecoins
New to the Crypto Markets? What Is a Stablecoin? Discover Various Types & How They Work
A peculiar thing which we see in the crypto markets is that, irrespective of their location, a user is more likely to use a US Dollar-backed stablecoin, whether it be USDC, USDT, or FDUSD, than any other stablecoin like XAUt, CNYt, or EURt.
Besides being backed by the US Dollar, the money that is collected to issue the stablecoins, i.e., the money that backs these coins, is invested into Treasury Bonds, which are issued by the US Federal Reserve in the name of the US Government.
In the report shown above, 111 billion out of 118 billion, i.e., 94% of Tether’s reserves, lie in various US Treasury bonds.
Hence, every time the supply of dollars increases or decreases, the value of the dollar changes too, and since stablecoins are pegged to the US Dollar, the value of stablecoins also changes. An increase in the supply of dollars devalues stablecoins marginally but also allows the inflow of more money into crypto markets, a reason why all crypto markets have been asking for a rate cut in 2025.
Stablecoins Provide Liquidity to Crypto Markets
The final part of understanding the impact of US Fed Policy lies in how stablecoins act in crypto markets.
Unlike most cryptocurrencies, stablecoins are not traded because of their value. They are bought for two reasons: one is to transmit funds without loss (value is fixed), and the second is to invest in and out of other cryptocurrencies. Our concern is the second part.
Stablecoins allow you to keep your portfolio at the same value unless you find a money-making opportunity in the markets. And also when you move out of any investment, i.e., sell your crypto, stablecoins help you avoid further losses or help retain profits.
Therefore, the more stablecoins in the market, the greater the purchasing power of the market. More stablecoins are only possible when there is more money being released into the markets which in turn happens when the Fed cuts interest rates.
Markets are expected to get volatile soon. Here are a few things to learn to protect your capital.
