Weekly Market Update - Friday, March 24, 2023

Crypto Topic of the Week — Interest Rates

Interest rates can significantly impact the crypto and wider financial markets, as we’ve seen over the past months. As one of the most important monetary policy tools governments have at their disposal, this week, we provide a high-level overview of what interest rates are and why they matter.

What are interest rates? Interest rates represent the cost of borrowing money, or the return lenders receive for lending money. Central banks, like the U.S. Federal Reserve, generally set target interest rates which influence rates throughout financial markets. Based on the number they set, lending institutions — commercial banks, credit unions, and the like — will calculate the interest rate they charge their customers. When setting their rates, lending institutions will also take other variables into consideration, such as a borrower's credit score.

Interest rates are generally quoted as an annual percentage rate (APR) or annual percentage yield (APY). These reflect the rate that a lender charges a borrower for a consumer loan (APR), or the amount a consumer receives from a financial institution when storing their money in different vehicles (APY). Most industries pay close attention to interest rate changes, as they affect consumer and corporate debt, the health of financial markets, and the economy as a whole.

Why do interest rates matter? As an important tool used by governments and central banks to influence economic activity, interest rates matter for a variety of reasons. We touch on some of the main impacts below.

Borrowing and lending: The immediate impact of interest rates is on the cost of borrowing money, and the return on lending money, as explained above. When interest rates are low, borrowing is cheaper, potentially encouraging individuals and businesses to take out loans to invest or spend. Conversely, high interest rates often have the opposite effect, leading to less spending and lower demand.

Consumer and business spending: Lowering interest rates, which we saw the Fed do throughout much of the early 2020s in response to the economic impact of the COVID-19 pandemic, can stimulate spending and boost economic activity. Keeping rates low for long periods of time, however, can increase inflation as more economic activity pushes prices higher. At a high level, this is the dynamic that the Fed has been dealing with over the past few months, which has led them to quickly raise interest rates.

Investing: Interest rates can also play a role in investment decisions. Low interest rates often drive individuals and businesses to invest in assets like equities, and crypto, as the potential returns may be higher than other investments. This dynamic could be playing out in real time, as recent signals from the Fed that it may slow rate increases has been accompanied with equities and crypto running higher.

Currency impacts: While this is certainly not an exhaustive list of how interest rates can impact financial markets, another final major impact they have is on the value of fiat currencies. Central banks set their national interest rates at different levels, depending on the economics of each. When a country's interest rates are higher than those of others, its currency may become more attractive to foreign investors seeking higher returns. This can lead to an increase in demand for the country's currency, driving up its value relative to other currencies.

You can read more about interest rates here.

See you next week. Onward and Upward!

Team Gemini

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