Powell Reaffirms Aggressive Stance To Rate Hikes. What Does it Mean For Crypto?

Equities fell and crypto markets plummeted after Federal Reserve Chairman Jerome Powell reiterated his agency’s aggressive stance towards future interest rate hikes. The Dow Jones Industrial Average fell by 1.85% while the S&P 500 and Nasdaq Composite witnessed declines of 2.18% and 2.71% respectively immediately after the Fed’s speech.

Bitcoin price fell by almost 5% following Powell’s speech before recovering. As of this writing, it is changing hands at $20,673.83, down 4% from its price 24 hours ago, based on data from Coindesk. There was no such luck for Ethereum’s Ether, whose price had surged in anticipation of its impending transition to a Proof-of-Stake (PoS) consensus mechanism. Its price dipped when Powell began speaking and was down by 7%, $1,574.37, from the same time a day ago, as of this writing.

In his remarks at the Jackson Hole symposium, Powell signaled that inflation would remain top priority for the Fed in the coming months. “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” he said. The inflation reading for the previous month came in at 8.5%, an improvement over the previous month’s 9.1% figure.

Powell also referenced previous Fed Chairman Paul Volcker whose regime of punishing rate increases brought inflation under control in the early 1980s. One of the outcomes of sustained rate increases over several years was a high rate of unemployment.

The chances of that happening this time around seem remote, however. While inflation figures have been at record highs this year, they have been accompanied by a raft of positive economic data, including low unemployment. The latest such figures, in fact, came today in the University of Michigan consumer sentiment index, which showed an improvement, and the personal consumption expenditures index improved on a month-to-month basis by 0.1%. On a yearly basis, however, it increased by 6.3%.

What Do Powell’s Remarks Mean for Crypto?

The most obvious conclusion to Powell’s remarks is the degree of correlation between crypto markets and Fed policy. For most of its growing up years, Bitcoin remained impervious to the central bank’s maneuvering of the economy. Maturity and the advent of institutional money has made broken down those walls, however. Crypto markets have been on edge for most of this week in anticipation of Powell’s remarks, meaning the “bitcoin don’t care” meme has run thin. For example, bitcoin price jumped last month after the Fed raised interest rates by 0.75 percent. Meanwhile, other factors influencing crypto prices, such as transaction volumes, have taken a backseat.

Aggressive interest rate hikes reduce liquid money supply, or M1, available in the overall economy and channel funds away from risky assets, like Bitcoin, and towards savings and income instruments.

As consumers and investors pull back from risk, the consensus is that crypto markets will suffer. The Fed’s aggressive stance could increase the interest rates from the current range of between 2.25% to 2.5% to almost 4% by the end of this year based on Kansas City Fed chief Esther George’s comments to Bloomberg TV. This means that crypto prices may not have bottomed yet.  

But there are many factors that might complicate this neat equation.

Bitcoin and crypto prices have risen in the past based on positive developments within the crypto ecosystem. Ethereum’s PoS transition, which has a date of September 15, should witness more trading activity for its cryptocurrency.

The rising tide of crypto scandals and regulatory scrutiny also affect prices. In recent months, both have had the effect of depressing prices within its ecosystem. The tide could also move the other way and an affirmation for crypto from regulatory authorities may boost its price.

Finally, there are the intermittent spigots of money that the US Treasury keeps releasing into the economy. The cancellation of student debt is not expected to affect inflation, but it does put more disposable money into the hands of millennials, who have driven the retail embrace of crypto. The pandemic stimulus spurred bitcoin’s price to record highs. The money from debt cancellation may not have the same effect but it could potentially help ward off the harmful effects of future interest rate hikes on crypto prices.

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