Prevailing doubts over whether the Federal Reserve has what it takes to hit its 2% inflation target hit traditional markets and may have contributed to a bitcoin price drop early on Thursday.
- CoinDesk data shows bitcoin's price fell to just under $10,900 in the Asian trading hours – not long after it had climbed to near $11,100.
- The drop is bitcoin's latest failure around the key psychological hurdle and could be the result of prevailing doubts over the Fed's ability to hit the 2% inflation target.
- At the Federal Open Market Committee (FOMC) meeting Wednesday, Fed Chair Jay Powell said the U.S. central bank would keep interest rates at zero until 2023, when the Fed expects to hit its 2% inflation target.
- It follows Powell's announcement last month that the Fed would tolerate inflation above the 2% target to compensate for the drop in consumer prices earlier in the year.
- The prospect of high inflation is generally considered good for bitcoin and the price instantly ticked up above the $11,000 mark following the FOMC announcement.
- But some market observers are now concerned whether the Fed has what it takes to reach 2% inflation.
- Speaking to the Financial Times, John O'Connell, a portfolio manager at Garda Capital, said the Fed hadn't been able to create inflation consistently for a very long time and still had much to prove.
- Indeed, the Fed announcement was met with general uneasiness across the market. The S&P 500 slumped 0.46% and the Nasdaq fell a further 1%, while both bond yields and the U.S. dollar strengthened slightly.
- Similarly, an announcement from the Bank of Japan to keep rates unchanged this morning led to the Nikkei dropping 0.67% in the Asia trading day.
- The Bank of England has also just announced it will keep rates unchanged at 0.1%.
- While there's a case for bitcoin benefiting in a deflationary environment, it nonetheless goes against the prevailing narrative that the original cryptocurrency's fixed supply makes it an ideal hedge against the deleterious effects of a runaway money supply.
- Analysts have previously warned bitcoin prices remain vulnerable to sell-offs in stocks.
- Bitcoin was trading at $10,890 at press time, little changed over 24 hours.
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