What the Federal Reserve’s Hawkish Tilt Means for Bitcoin

By Landon Hamilton Last updated Apr 19, 2022

Bitcoin’s rally of relief – after the hawkish tone of the US Federal Reserve amid the new Omicron threat – appears to be running out of steam, as the largest cryptocurrency by market cap fell more than 3.5% to $ 47,000.

Bitcoin had climbed from $ 4,000 to $ 49,000 on Wednesday, when the U.S. central bank set the stage to raise interest rates earlier than expected, removing the stimulus that had supported markets for more than a year and half. Its projections show that interest rates can reach 0.90% by the end of 2022, from current levels close to zero. Some analysts have called this hawkish tilt a “Powell’s pivot” as policymakers previously debated whether to raise rates because inflation was transient.

The Fed had also announced the acceleration of the close of the bond purchase program, citing concerns about higher inflation. The rate of inflation is uncomfortably high, Fed Chairman Jerome Powell said at the end of the two-day policy meeting.

After the COVID-19 pandemic hit the country in March 2022, the Federal Reserve lowered interest rates to near zero levels. And he was spending $ 120 trillion every month to buy treasury bills as part of his crisis bond buying program.

As the global economy showed signs of recovering from the pandemic, for months Fed policymakers believed inflation was “transient” and would subside on its own as it progressed. that supply chain bottlenecks would ease. But no luck. U.S. inflation soared to 6.8% in November, its highest level since 1982.

Bitcoin, which fell below $ 50,000 after bears took control of the market earlier in December, rose more than 2% to hit $ 49,000 again. However, that didn’t last long as the coin fell more than 3% to $ 47,000 on Friday. Meanwhile, the Bank of England has raised interest rates from almost zero to 0.25%, becoming the first of the world’s advanced economies to do so.

The drop followed the overnight sell-off on Wall Street when the tech-rich Nasdaq fell more than 2.5%. Experts said investors are reallocating money from risky bets like Bitcoin and tech stocks.

“The crypto space is going through a lot of repositioning and this is driving unwanted selling pressure, but the medium to long term outlook remains firmly in place,” said Edward Moya, a lead market player at Oanda. CoinDesk.

Bitcoin is viewed by many experts as a hedge against inflation, as Bitcoin’s supply is limited to 21 million, as opposed, for example, to the US dollar, which typically increases over time. So if the supply of the US dollar increases, when the supply of Bitcoin is limited, the value of Bitcoin in USD should increase, ceteris paribus.

However, Bitcoin is also a risky asset. And easy monetary policies cause investors to make risky bets, if central banks tighten monetary policies and make it harder to obtain credit, risky bets like Bitcoin become riskier and less attractive.

“On the one hand, a tightening of monetary policy may lead to slower growth in demand for Bitcoin, as many use it to hedge against inflation, and less QE, in theory, means less inflation. “said Joe DiPasquale of crypto hedge fund BitBull. CoinDesk. QE, or qualitative easing, is a monetary policy tool in which central banks buy long-term securities to increase the money supply in the economy. Less QE decreases the money supply in the economy. The Federal Bank’s asset purchase program (buying $ 120 billion worth of treasury bills) was the largest QE in history.

On the flip side, DiPasquale said, “the effects of the biggest QE of all time could lead to the highest inflation in history, regardless of the Fed’s attempt to scale back.” If this happens, Bitcoin’s demand and price may reach new all-time highs, DiPasquale said.

First publication: Dec 18 2021, 19:23 STI

What the Federal Reserve’s Hawkish Tilt Means for Bitcoin

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