Crypto Up, Rates Down by 0.5% – Is the Fed’s Inflation Mandate Actually Good?

• The Fed cut the interest rates by 0.5%, which drove Bitcoin ($BTC) and crypto up (alongside crypto stocks). $BTC increased by 8.16% in the last week.
• According to official sources, the current US inflation is 2.53%. However, the CPI (Consumer Price Index) often understates inflation, especially for workers relying on a wage.
• Due to their anti-debasement mechanism, Bitcoin and crypto are a natural hedge against inflation.
• Non-investors are naturally more vulnerable to inflation because they don't have as much money to invest in inflation-hedging assets.

As soon as the Fed cut rates by half a percentage point, Bitcoin and crypto stocks began soaring. $BTC increased by 8.16% in the last week, and the total crypto market volume rose by 6.83% in the last 24 hours.

But did the Fed's interest rate cut cause this, or was it a natural progression because many TradFi participants are holding Bitcoin as a hedge against inflation?

And does the Fed's 2% inflation mandate really benefit the economy, or is it harming the working class? Let's not forget that the debt-to-GDP ratio is over 100%, further exacerbating things.

The Fed doesn't often cut interest rates; when they do, a recession is likely looming. They last did it four years ago during the Covid-19 pandemic.

Let's discuss the current situation, why crypto is going up, and how the Fed interest rate cut could impact the US.

Why Did the Fed Decrease Interest Rates?

Typically, the Fed increases interest rates when inflation is above 2% to keep in line with the inflation mandate and decreases the rates when inflation sinks below 2%.

The current CPI numbers show a 2.53% US inflation rate. That's the official number, but the average person is likely experiencing inflation at 2-3x the magnitude.

That's due to several factors:

• CPI calculations often understate inflation, as they don't fully reflect the true cost of living. Things like substitution bias (changing buying habits based on price movements) and a failure to capture changes in living standards make theCPI unfair to the working class.
• The 2% inflation mandate slowly erodes purchasing power if wages don't keep up with inflation (they very often don't).
• Inflation for essentials (like healthcare, housing, and education) often rises faster than the overall inflation rate, masking workers' true costs of living.
• More expensive borrowing (due to inflation and higher interest rates) puts more strain on people with no investments or small cash reserves.
• Non-investors are more vulnerable to inflation because they can't invest much in inflation-hedged assets, leading to a net loss in purchasing power over time.
• The over 100% debt-to-GDP ratio, combined with extra interest payments from higher interest rates, means the government is likely spending less on social programs and infrastructure, negatively impacting workers.

So, logic says that the Fed should have increased interest rates to try and reduce inflation. Why the 0.5% rate cuts, then?

The debt-to-GDP ratio is over 100%, meaning the US owes more money than it currently makes. Currently, the US allocates 13% of its GDP to interest payments, and anything extra would be an additional burden on the state. A lower interest rate also alleviates the government's debt burden.Is This Good for Crypto?

The theory goes like this - lower interest rates typicallyencourage people to invest their money instead of holding it. This includes higher-risk assets like crypto.

However, we speculate there's more to it than that. A non-negligible number of traditional finance (TradFi) investors could be using Bitcoin as a hedge against inflation.

The current interest rate cut is likely also aiming for longer-term behavioral financial effects (instead of immediate ones) from market participants.

Bitcoin is now $63K, while Ethereum is over $2.6K. The entire crypto market has pumped, with CoinMarketCap's Fear & Greed Index sitting at a neutral 51.

The idea is that Bitcoin (and crypto overall) is diametrically opposed to inflation, built with anti-debasement in mind. This means TradFi and DeFi investors will likely prioritize crypto during periods of high inflation to safeguard against currencies losing value.

Conclusion - Are We Headed for a Recession & Is Crypto Helpful?

While we clearly can't predict a recession, the Fed's history of rate cuts shows a worrying pattern - they always seem too late to prevent financial crashes.

Crypto should remain an attractive investment for investors looking to guard against inflation. What happens next remains to be seen, though.

ReferencesClick to expand and view references

• The Fed and the Dual Mandate (Federal Reserve Bank of Saint Louis)
• US Inflation Rate (Y Charts)
• Shortcomings of the Consumer Price Index as a Measure of the Cost of Living (Lumen Learning)
• More workers find their wages falling even further behind inflation (Federal Reserve Bank of Dallas)
• Work, Retire, Repeat' - Half of American Retirees Do Not Have Enough to Be Retired: Report (The Daily HODL)
• What Is Monetary Debasement? Examples, Effects and Solutions (NASDAQ)
• Federal Funds Rate History 1990 to 2024 (Forbes)

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