Federal Reserve Chair Jerome Powell recently delivered an address that sent shockwaves through the traditional financial and cryptocurrency markets.
Powell’s surprising suggestion of a pause in the central bank’s series of interest rate hikes has generated significant interest and debate, with profound implications for the cryptocurrency market, including Bitcoin and other digital assets.
The story from the Wall Street Journal was shared on X by Colin Wu, a Chinese crypto news reporter. According to the report, Powell believes the recent increase in long-term Treasury yields (which are interest rates on government bonds) might give the central bank an opportunity to pause its series of interest rate hikes.
Read Also: Fed Chair Jerome Powell Does Not See Crypto as a Financial Stability Concern for U.S. Markets
This potential pause in raising interest rates is contingent on the condition that progress is made in controlling inflation.
WSJ: Federal Reserve Chair Jerome Powell suggested the run-up in long-term Treasury yields could allow the central bank to suspend a historic run of interest-rate increases so long as recent progress on inflation continues.
Powell’s remarks at a Thursday lunchtime address in New…
— Wu Blockchain (@WuBlockchain) October 20, 2023
The Effect on Bitcoin and Cryptocurrencies
Powell’s hint at a pause in interest rate hikes can be viewed as a stabilizing factor for traditional markets. Powell’s words carry substantial weight in the world of finance.
If inflation remains in check and long-term interest rates continue to rise, the Federal Reserve may consider temporarily stopping its efforts to raise interest rates. This decision would have significant implications for the broader economy and financial markets.
A positive response from the market could cause an inflow of funds into the crypto market. Traditionally, the sentiment in mainstream financial markets often influences the crypto market. When conventional markets are stable, institutional investors explore riskier assets like cryptocurrencies to diversify their portfolios.
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A pause to interest rate increase could lower the yields from traditional financial instruments. This pause would increase the appeal of the top cryptocurrencies as stores of value. Retail and institutional investors could flock into the crypto market, putting more money in the riskier crypto markets.
Bitcoin holds a special status in this scenario. As the biggest and most popular cryptocurrency and considered “digital gold” by many, its status will become more pronounced, and it could attract the most investors.
Read Also: Federal Reserve Chairman Jerome Powell Says United States Has No Plans to Ban Bitcoin and Cryptos
The DeFi Yield Gap
The decentralized finance (DeFi) sector is notoriously sensitive to interest rate changes. Stopping the interest rate increase could create a yield gap between conventional financial instruments and DeFi, putting DeFi platforms ahead.
This gap is because yield farming and staking offered by DeFi platforms often offer greater yields than traditional financial products. This yield gap could attract many investors into DeFi. An inflow of investors combined with the upcoming Bitcoin halving could send Bitcoin to unprecedented heights, taking the rest of the crypto market up.
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