The Fed’s Fund Rate Correlates With Stablecoin Liquidity: Analyst

According to Tom Wan, Research Analyst at 21.co, two significant stablecoin liquidity drops have occurred since Terra and FTX crashed. Wan used on-chain data to identify a corresponding behavior in the USDT and USDC liquidity on AAVE V2 as measured against the Fed’s fund rate.

The research analyst recently posted about the correlation between the Fed’s fund rate and the stablecoin liquidity on X. In the post, Wan revealed that in September 2022, the Fed raised interest rates by 75 basis points from 2.33% to 3.08%. Following the interest rate increase, the USDT and USDC liquidity dropped by $1 billion, equivalent to a 55% drop.

In a similar scenario, Wan noted that in July 2023, the Fed raised rates by 25 basis points from 5.08% to 5.33%, and the stablecoins liquidity responded with a $380 million drop, equivalent to 33% of its original value.

Following his observation, the research analyst thinks that stablecoin rates in decentralized finance (DeFi) have become less attractive from a risk and reward perspective. He hinged his opinion on the fact that both sectors appear to be offering similar rates.

Wan noted that the demand for leverage has spiked with the recent bullish sentiment, which could increase the supply and borrowing rate. According to the research analyst, he is closely watching the lending protocols to see if their liquidity and supply rates will rise.

On Thursday, Fed Chair Jerome Powell suggested that the regulator is in no hurry to further raise its benchmark interest rate, given evidence that inflation pressures are continuing to ease at a gradual pace. However, he did not rule out a rate hike to help reduce inflation to the Fed’s target level of 2%.