Connection Between US Fed Interest Rates, Inflation, and Bitcoin Rallies

As the debate between the US Federal Reserve and the US Government heats up on interest rates, it becomes essential to understand why everyone is not on the same page. If interest rate cuts can help the economy, then why is the Fed adamant on not cutting them this May?In this article, we will try to understand why taking an interest rate decision is not as easy as it may seem.The Federal Reserve’s Role in Shaping Cryptocurrency MarketsInterest Rate Cuts are Both Good and BadWhenever the US Federal Reserve raises its interest rates it releases a certain amount of liquidity or money into the markets. This extra money is then used by consumers, business owners and investors to take a loan and pay for various kinds of things that otherwise they wouldn’t have afforded.As a result, the circulation of money increases in the economy, and we see economic demand rise. Inflation in the USA Since 2021, A Deciding Factor in US Fed Interest RatesInflation is nothing but market demand gone up to an extent where supply cannot keep up. Higher demand and lower supply raises the prices of goods driving up inflation.Another desired effect of this increase in money supply is that it lowers the amount you pay on loans and encourages investors to invest more money into stocks and crypto.We saw this in the COVID economic stimulus when net interest rates dropped to zero in the USA and in the coming years i.e., 2022-24, the inflation soared to a high of 10% and remained well above 3% till the end of 2024.Although the COVID rate cut helped markets make an all-time high (Nov 2021) in the short run, the net effect was actually worse in the long-run. A prolonged crypto winter in 2022-24 wiped out nearly 75% of Bitcoin’s value and killed a lot of Web3 startups including the entire Metaverse sector.$COIN The Global Head of Research for Coinbase argues crypto winter May arrive soon "Several converging signals may be pointing to the start of a new 'crypto winter' as some extreme negative sentiment has set in due to the onset of global tariffs and the potential for further... pic.twitter.com/oucuqzZlxp— Crossroads (@Kross_Roads) April 20, 2025Inflation Kills Your Buying PowerThe much-heated aspect of inflation is that it raises prices of goods and services to an extent where it disbalances your monthly budget. This is one of the key reasons why people like cryptocurrencies like Bitcoin that beat inflation in its entirety of existence.Let us understand this via a shopping list comparison between 2020 and 2025.Comparison Between 2020 and 2025 Grocery Prices For the Same OrderA close inspection reveals that prices have inflated by 33% in the last five years. The same grocery list that cost $15.87 in 2020, now costs $21.17.The reason why people do not realize the essence of inflation at any given year is that for most of its time, inflation grows marginally every year. In the long run, anyone can see the difference clearly. Google Willow Vs Bitcoin: Is Quantum Computing the Next Big Threat?Bitcoin Beats Inflation, Gives You Financial FreedomBelow is a chart presented by Michael Saylor, a well-known Bitcoin maximalist and the Chairman of Strategy (formerly MicroStrategy). Saylor presented this information while giving a presentation on Bitcoin for Cantor, a wealth management company.Michael Saylor’s Presentation at CantorIn the image, we can clearly see how Bitcoin has given an annual return of 60% on a CAGR basis since its birth, beating inflation for the same period (CAGR 15%) by a factor of 400%Other cryptocurrencies like Ethereum and most altcoins are unable to repeat this feat of Bitcoin because of the excess volatility in them. For example, take the period between December 2024 and March 2025 when Bitcoin fell by 25%. In the same period, Ethereum, the top altcoin, fell by a staggering 65%.Use Rate Cuts to Your AdvantageTo avoid falling into the inflation trap, you can simply buy appreciating assets like Bitcoin. Past data proves that each time the rates were cut, Bitcoin had a decent rally. In 2024, a 0.75% net rate cut helped Bitcoin grow from $50k to $70k even before Donald Trump won the US elections.Bitcoin Price Behavior in Last 12 MonthsGiven the current market conditions, where Bitcoin is already in an oversold zone, a rate cut would help it cross $100k in no time and help you make a decent return on your investment.Just investing isn’t enough. You need a good cold storage solution for your Bitcoin.ConclusionA reducing interest rate can increase the inflation and make your bills more expensive. Also, the same rate cut also helps Bitcoin make a rally by infusing the markets with more liquidity. Surprisingly, you can use this situation to your advantage, buy Bitcoin, and get a return that beats inflation.Want crypto for free? Try getting an Airdrop.