Originally posted on Crescent City Capital 

By Nicolas Abington | Crescent City Capital Market Analyst Intern

The federal funds rate is a tool of the fed to apply monetary policy on the market by controlling short term circulation of the US Dollar on the market. The Fed is able to adjust the federal funds rate by issuing/buying US government-backed securities such as a treasury bill, note, or bond. In times of economic distress, the fed will sometimes lower the fed funds rate to make borrowing easier for the general populace hoping to result in an economic boost.

As many of you know, the Fed has officially set the federal funds rate to 0%. Such a low federal funds rate has not been seen since December of 2008 to help combat against the last great recession caused by the collapse of the housing market. The drop in the rates marked the maximum amount that the federal reserve can use this tool before pushing rates negatively or switching to printing money outright.

Before we talk about the effects that these have on cryptocurrency, the drop in the federal funds rate has had an effect on the 10-year treasury yield. After the rate cut took place over the weekend, the yield spread between the one month to the ten year has spread out in opposite directions. The data shows that market sentiment has an extremely high demand for government debt in the short term but less so in the future. To learn more about the characteristics of bonds to understand this phenomenon, here is a helpful resource. 

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