The base rate of the Federal Reserve System (FRS) is the lending rate at which banks provide short-term loans to each other. If a bank needs to transfer or “cash out” funds to a client, but its reserves are not enough, then it borrows capital from another financial institution for a short period of time at a minimum percentage.
How are the Fed’s base rate and risk level related?
Every financial asset has a certain level of risk. From the point of view of macroeconomics, assets are divided into two main types:
- Risky assets are instruments with a floating yield, which depends on the behavior of investors, dynamics and market conditions. Risky assets include shares of public companies. Bitcoin does not yet have a clear status, however, under certain market conditions, it behaves as a volatile and high-risk asset, the price movements of which coincide with the dynamics of the stock market.
- Assets with a low level of risk, or protective assets, have a low return, but in general a stable price. They act as a store of value during periods of economic downturns. Such assets include some fiat currencies, precious metals (particularly gold), government and corporate bonds with a high rating. In addition, an increase in the rate leads to an increase in the yield of US government bonds, which are the main anti-crisis asset in the world.
The Fed’s base rate is the main instrument of monetary policy in the United States. A change in the base rate has a significant impact on the state of the financial system, the stock market and is reflected in the value of various asset classes, including bitcoin and cryptocurrencies.
Historical data shows an inverse relationship between the Fed’s base rate and the price of BTC: a decrease in the Fed’s rate leads to an increase in the capitalization of bitcoin and other digital assets, and vice versa.