Fed's Hawkish Pivot May Not Last, Bitcoin Analysts Say
The Fed might not act as decisively in tightening monetary policy if financial stability concerns start to outweigh the risk of fast inflation.
As markets swoon in the face of the Federal Reserve's recent pivot to tackle inflation, some crypto analysts are already calling the U.S. central bank's bluff.
Bitcoin prices have plunged alongside stocks as the Fed moves to reverse nearly two years of emergency monetary stimulus. But some top crypto analysts argue that Fed Chair Jerome Powell and his colleagues may quickly back off from their new campaign to tighten monetary policy – due to worries that traditional markets, the banking system and the real economy can’t handle the higher borrowing costs.
The analysis gets at the heart of economists' debates these days over the Fed's willingness to maintain the hawkish stance if the economy starts to go into recession or if stock prices suddenly tank. It goes back to the "Fed put" – the notion that investors can count on getting bailed out by the U.S. central bank without having to worry about unlimited downside.
The theory is that bitcoin prices might jump if the Fed were to reverse course and halt the tightening or even start stimulating markets again to prevent a recession – and to preserve the soundness of the traditional financial system. The Fed is widely expected to start raising interest rates next month for the first time since 2018, and to keep tightening monetary conditions over the course of the year.
Even before the Fed gets going, some analysts are already starting to handicap when the U.S. central bank might start to ease up.
“I anticipate that we are to see some slowdown in” the pace of Fed monetary-policy tightening, said Edward Moya, senior market analyst at the foreign-exchange brokerage Oanda. “If there’s some cracks in the economy and the Fed goes slower, that is going to provide a spark here for bitcoin.”
During a press conference last week, Powell noted that the economy has reached the point – with inflation ticking up and coronavirus cases waning – when the time for extreme monetary stimulus has passed.
“The economy no longer needs sustained high levels of monetary policy support,” Powell said.
But he left himself ample wiggle room to maneuver in case the outlook changes.
"Of course, the economic outlook remains highly uncertain," Powell said. "Making appropriate monetary policy in this environment requires humility, recognizing that the economy evolves in unexpected ways. We will need to be nimble so that we can respond to the full range of plausible outcomes.
Big Wall Street firms aren't completely in sync on how fast the Fed will move to tighten monetary policy, but they're in agreement on the general trajectory: Bank of America predicts seven 0.25 percentage point rate hikes this year, while JPMorgan, Goldman Sachs and Deutsche Bank forecast five and Morgan Stanley sees four.
Coinbase Institutional Research analyst David Duong said he's skeptical that the Fed will be able to keep cranking monetary conditions tighter if markets start to weaken.
He noted Powell's use of the term "financial stability" – often invoked by the Fed as a reason for loosening monetary policy. When the spread of the coronavirus in March 2020 sent global asset prices reeling, the U.S. central bank cited the threats to financial stability as a reason to pump trillions of emergency liquidity into money markets.
"I heard the phrase 'financial stability' more than once," Duong told CoinDesk last week in a video interview. "I take that as a signal that they are saying, We are concerned about financial stability, what’s happening in the market."
No one knows for sure how much stock market decline the Fed can tolerate. Among analysts who spoke with CoinDesk, most guessed 20% to 30%.
“I doubt the Fed will act decisively,” Duke University finance professor Campbell R. Harvey wrote in email to CoinDesk,
Market expectations, he said, are that the Fed will hike interest rates by 0.25 percentage point in March and another percentage point over the rest of the year. He said "that seems trivial" considering that inflation is running around 7%, with the Fed's benchmark interest rate currently around 0.08%.
Garrick Hileman, head of research at Blockchain.com and a visiting fellow at the London School of Economics, said that inflation might prove to be less daunting, which could give the Fed more room to ease off.
“We are not in an extremely unstable inflation right now,” he said. “Many sectors are deflationary. Tech is deflationary. These are all forces helping the Fed manage inflation.”
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