First Mover: Federal Reserve, Congress Play Game of Chicken Over Stimulus as Market Lurches

Markets from stocks to bitcoin have groaned amid dimming prospects for more U.S. stimulus, and neither Congress nor the Fed are taking the lead.

AccessTimeIconSep 24, 2020 at 12:51 p.m. UTC
Updated Sep 14, 2021 at 10:00 a.m. UTC
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It's becoming clear just how hooked investors have become on dollars injected into the economy by the U.S. government and Federal Reserve. 

Just take a look at what happened on Wall Street this week as the Republican-led U.S. Senate shifted its focus to confirming a new Supreme Court justice, and away from the passage of a new fiscal-stimulus package. The Standard & Poor's 500 Index fell 2.4% Wednesday, wiping out gains for the year and putting the U.S. stocks gauge on track for its worst month since March. 

“The market continues to reevaluate its previously very optimistic stance on the status of global risks out there,” Ben Randol, senior FX strategist at BofA Securities in New York, told Reuters

The simplest takeaway is that the lack of fresh stimulus is negative for economic growth, and therefore bad for corporate earnings and stocks. The diminishing chances for a new package prompted Ian Sheperdson, chief economist for the forecasting firm Pantheon Macroeconomics, to slash his forecast for fourth-quarter U.S. growth to 4% from 10%. Without more money injected into the economy, consumer spending will be lower than previously expected.

"It's just not possible for consumption to continue at its current pace in the absence of a much bigger income-replacement program," Shepherdson wrote. 

Bitcoin, which recently has shown a high correlation with stocks, has sold off this week as well, showing that most investors still prefer cash in a flight to safety. 

"Crypto has been unable to shake its recent correlation to the S&P," Micah Erstling, a trader at the cryptocurrency firm GSR, wrote in an emailed comment. 

The cryptocurrency is still sitting on a 42% gain for the year, and indeed digital assets were ranked this week by Bloomberg News as the world's top-performing investment category. As headlines trumpeting new stock-market highs in the mainstream financial press start to fade, bitcoin might get a second look from investors on the prowl for an alternative to traditional assets.

Bitcoin's price correlations have increased recently with both U.S. stocks and gold.
Bitcoin's price correlations have increased recently with both U.S. stocks and gold.

One clear theme is just how unified top Federal Reserve officials are in harping on Congress to provide a new fiscal-stimulus package, even as such efforts prove increasingly futile. 

A Bloomberg article on Wednesday recounted how not just Fed Chair Jerome Powell but a "parade" of top officials from the central bank's Chicago, Boston and Cleveland branches used public appearances to clamor for more fiscal aid

The upshot is that any new stimulus in the near term is going to have to come from the Fed itself, which already has cut interest rates close to zero and is currently printing about $120 billion a month to buy U.S. Treasuries and government-backed mortgages. 

Mary Daly, who heads the Federal Reserve Bank of San Francisco, said Wednesday that central-bank economists won't know it's time to start tightening monetary policy until higher inflation actually shows up

The Federal Reserve has already printed about $3 trillion of new money this year, expanding its balance sheet by about three-quarters, which has encouraged cryptocurrency analysts in their assertions that bitcoin stands to benefit as an inflation hedge. 

A new round of stimulus to stanch the losses on Wall Street might bolster demand for inflation hedges, which might get bitcoin prices going up again. That could help cement crypto's lead in the 2020 asset-class rankings, which in turn would probably lure in even more buyers.   

The Federal Reserve has added $3 trillion to its balance sheet this year.
The Federal Reserve has added $3 trillion to its balance sheet this year.

Bitcoin Watch

BTC and DXY new
BTC and DXY new

Bitcoin has bounced up to $10,400 from Wednesday's low of $10,150.  The cryptocurrency, however, may have a tough time maintaining the bullish momentum with the U.S. dollar showing signs of life. 

The dollar index (DXY), which tracks the greenback's value against major fiat currencies, is trading at two-month highs above 94. 

Bitcoin had been one of the biggest beneficiaries of the dollar's sell-off this summer. 

"Bitcoin will likely follow further downside together with precious metals given the DXY breakout," Matthew Dibb, co-founder, and COO of Stack, a provider of cryptocurrency trackers and funds, told CoinDesk.

- Omkar Godbole

Token Watch

Uniswap (UNI): Decentralized exchange token's new governance tokens defy DeFi sell-off

MakerDAO (MKR): DeFi stablecoin lending protocol won't compensate victims of March 12 flash crash, based on voting results.  

Ether (ETH): Volatility could surge on Friday, FX Street writes via Forex Crunch, as Ethereum's native token approaches September options expiry that is biggest "in the history of the digital asset." 

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