With a couple of comments, Jerome Powell, director of the United States Federal Reserve, turned the tables on the market. Bulls were counting on a much more optimistic outlook for future Fed actions. It was assumed that the fight against inflation was on the right track and that interest rates would not have to rise much above 5%. Due to these assumptions, optimism invaded the market and consequently bullish sentiment began to circulate. Now, it seems, these assumptions are being called into question. Because everything seems to indicate that the fight against inflation is not on the right track. This would require greater aggressiveness on the part of the Reserve as far as monetary policy is concerned.
What used to be optimism is now doubt and disappointment. The market expected a new increase of 0.25% for the next meeting. However, now the possibility of a 0.50% increase is back on the table. It all depends on the data as it arrives. In particular, You have to be very attentive to the inflation data and the labor market data. If the results are worse than anticipated, the most feared thing can become a reality. What do we fear? Bigger increments for longer.
Before Powell’s comments, market expectations and valuations were based on a final rate of 5%-5.25%. Then a pause. And then possibly an eventual turnaround in money. In other words, the world as before the pandemic. A return to stimuli. A return to cheap credit. Now that ideal scenario is not proving very likely. It is still possible. But, as of this week, it’s unlikely. Now we could be talking about a final rate of 5.75%-6%. This implies that, like it or not, expectations and assessments must be adjusted to the new paradigm.
Is it still possible to avoid a recession with rates close to 6%? We do not know. But certainly now the idea of a soft landing is less likely than before. We must remember that in today’s world what really drives the economy is credit. And there is no more important creditor on this planet than the Federal Reserve. The cost of credit directly influences demand. And the level of demand has a profound impact on valuations. In other words, the decisions of the Federal Reserve are a determining factor in estimating the price of Bitcoin.
Before buying or selling, you have to weigh very carefully the monetary policy of the moment. Because? Well, because investing, to a large extent, is forecasting. In the case of speculative/non-yielding assets like Bitcoin, especially, liquidity is essential. Will tomorrow’s demand be greater or less than today’s demand?
Bitcoin is simply a fee. It is a code with a fluctuating price. Buy today at one price. And you can sell tomorrow to another. So, if you think that tomorrow’s demand will be higher than today’s demand, that works as an incentive to buy today.
How can we estimate future demand? With difficulty. But The cost of credit is definitely one of the most relevant variables. That is the importance of listening to Jerome Powell.
What is the problem? the latest reports inflation and the latest labor market reports. Inflation is not falling in the desired way. And the labor market is extremely tight. The one is linked to the other. Because the most worrying inflation comes from the service sector. And the big stone in the shoe in this case is the increase in labor costs. Why are wages increasing? Well, because the job market is exceptionally tight. Which in the current context is not good news.
As part of his mandatory semiannual testimony on monetary policy, Powell spoke this past Tuesday before the Senate Banking Committee and, the following day, before the House Financial Services Committee. Powell, of course, can’t talk about future Federal Reserve decisions. However, his speech has been widely interpreted as quite “harsh” in tone. Apparently, Jerome is determined to bring inflation down. With or without recession. And the rates will be raised to the level that is necessary.
Now, in the past, the market has repeatedly chosen to ignore Powell. The bulls have insisted, time and again, on predicting a supposed turn towards much easier monetary policy. Despite the Reserve’s statements, that optimistic attitude always manages to permeate. Apparently, the idea that everything will go back to the way it was before very soon does not refuse to die.
In the crypto space, many have been suggesting the end of the bearish period and the beginning of the bullish recovery, thus underestimating the relevance of macroeconomic factors in all this. We return to the usual justifications. Bitcoin scarcity, halving and adoption. Monetary policy? And the liquidity? And the market sentiment?
In the past, Bitcoin has thrived quite well under conditions of low inflation and high liquidity. Now that past is being used to predict the future in a kind of “history repeats itself” and the “future is written.” Lines are drawn on a graph. Previous cycles are discussed. 2013, 2017, etc. 2020. So, like an unstoppable force, the price is forecast to follow that same script going forward. apparently, the price of Bitcoin is predestined. And it’s only a matter of time.
Are we forgetting the role of liquidity in each of those booms speculative? What was the monetary policy during the previous bullish cycles? It is not very sensible to pretend that price action will follow previous patterns to the letter under such different conditions.. What was the rate in 2017? In 2020? In 2021? What will the rate be during the last semester of this year?
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