The Fed Wants You to Lose Money in Stocks and Probably Crypto, Too

Monetary policy works through financial conditions, including equities and consequently crypto, which has been highly correlated with the equity market.

AccessTimeIconSep 6, 2022 at 8:33 p.m. UTC
Updated May 11, 2023 at 4:49 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

The U.S. Federal Reserve’s campaign against inflation might not be finished until you’ve lost money on bitcoin (BTC).

The reason why goes back to the basics of central banking. The Fed does what it does with monetary policy (these days, raising interest rates) and that filters through the economy by impacting, among other things, how much key assets cost – “financial conditions,” in central bank jargon.

For most of this year, Fed policy makers have been sanguine toward markets like stocks, preparing traders in advance (called “forward guidance”) for upcoming changes to monetary policy. But that seems to be in the past. In July, Fed Chair Jerome Powell announced that central bankers would stop practicing forward guidance.

“It’s clear the Fed wants to see tighter financial conditions, which include lower stock prices,” Brian Overby, senior markets strategist at Ally, wrote in a note.

And that probably means crypto, too, because crypto prices have been strongly correlated with equities. That’s likely unwelcomed news for crypto investors, who’ve already suffered deep losses.

Bitcoin is already down over 57% for the year to date, according to CoinDesk data, grappling with a broader crypto asset sell-off fueled by industry bankruptcies and a struggling global macroeconomic landscape.

The U.S. central bank has two mandates: price stability and maximum employment. Right now, prices aren’t stable, with inflation running well above the Fed’s 2% goal. Meanwhile, the unemployment rate is still low and employers are adding over 300,000 jobs per month. That’s great news for job seekers but, perversely, something that could fuel inflation, raising pressure on the Fed to take even stronger action.That spells potential trouble for markets like stocks and crypto.

“The Fed wants to create a reverse wealth effect and get people that own assets to rethink some of their purchase habits and maybe slow demand,” said Jim Bianco, president of Bianco Research.

“It’s a dangerous game,” he added. “You want the market to go down, but you gotta be careful when that starts to happen because if you get everybody running for the hills because they’re going to be the enemy of the market, you could turn it into a rout.”

Even though U.S. gross domestic product has contracted for two straight quarters, the economy seems to be in good enough shape to withstand continued aggressive rate hikes. Further signs of weakness, though, will test the Fed’s resolve and force policy makers to evaluate how much pain they want to cause in markets.

“It's very possible that [the central bankers] could very well cave once they're faced with some really bad employment numbers, but they haven't been so far,” Bianco said. “I don’t think they will but I completely understand that argument.”

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Helene Braun

Helene is a New York-based reporter covering Wall Street, the rise of the spot bitcoin ETFs and crypto exchanges. She is also the co-host of CoinDesk's Markets Daily show. Helene is a graduate of New York University's business and economic reporting program and has appeared on CBS News, YahooFinance and Nasdaq TradeTalks. She holds BTC and ETH.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.