The United States Federal Reserve (the Fed) has the weight of the world on its shoulders. It is the guardian of the almighty US dollar. Its function is to direct monetary policy. And that power was fully demonstrated during the pandemic. The actions of the Fed influence prices, wages, credit and the economy in general. The Fed obeys a double mandate: First, guarantee full employment. Second, maintain price stability. Has the Fed failed? Yes. But the answer needs an explanation.
In an increasingly polarized world, every debate, whether we like it or not, becomes a partisan political issue. There are right-wing opinions. And there are leftist opinions. The posture itself usually takes a backseat. The most important thing, it seems, is to be on a friendly side while attacking the enemy side. Because today’s world is divided into them and us. They are the culprits. And we are the innocent ones. Which seriously complicates the matter, because it’s terribly difficult to talk about an institution like the Federal Reserve objectively. Today’s reader often begins reading defensively and biased. He only accepts what he already considers to be correct. The only truth is the ideological dogma of the tribe. Everything else is the lies of the enemy. Usually there is no change. There is no reflection. There is only combat between sides.
For the most radical conservatives and libertarians, the Fed is always to blame. Consequently, not demonizing the Fed is usually a rather dangerous adventure. Automatically, it makes you an “evil progressive”. That is, a member of the enemy side: “A Keynesian.” In this battle, it seems, there are no free agents. You are on one side. Or are you from the other? If you do not conform to the propaganda of one side, you must necessarily belong to the enemy side. You are system or anti-system. There are no half measures.
Now, what role should the apolitical investor assume? I am referring to the subject who simply wants to grow financially and is forced to carry out a macroeconomic analysis of the moment from time to time in order to design his investment portfolio. That individual must be pragmatic. You must have a cool head to be able to weigh the consequences of the Fed’s actions. In this way, make the right financial decisions. The investor must rely on indicators to draw a picture. If the outlook is optimistic, we can take riskier actions. If the outlook is pessimistic, surely, we should be more careful.
The investor normally owns assets. You buy at one price and hope to sell at a much better price in the future. You could say that he buys optimistically and sells pessimistically. An optimistic investor believes that his favorite asset will become more and more scarce and the demand for him in the future will be more and more. And a pessimistic investor believes the opposite. The price is always the reflection of a series of subjective and objective factors. The investor always buys with an expectation. And he sells with a fear.
Currently, we are going through a strong wave of pessimism. Namely, many investors think that demand will decrease due to current macroeconomic conditions. At the beginning of the pandemic, in 2020, the restrictions caused a deflationary crisis that affected income and employment very deeply. Consequently, the Fed injected historic amounts of liquidity to artificially boost demand. It did that by lowering interest rates, and buying government and corporate bonds. In fact, the same recipe was used for the 2008 crisis. And, indeed, a recovery was experienced. Of course, it was a rather uneven recovery. It mainly benefited the owners of assets, because a speculative boom was formed with so much liquidity in circulation.
Over time, the economy did indeed begin to recover. Tax spending increased. Revenues began to improve. And the employment rate began to rise. The Fed warned us that we would have a “transitional” period of inflation above conventional targets as a necessary evil to be able to reactivate the production and distribution chains, hard hit during the worst of the pandemic. So far we’re doing fine. But the matter was complicated. Inflation got out of control. The economy overheated. The labor market overheated. And the production and distribution chains, it seems, were worse off than was believed. What did the Fed do? Nada. She didn’t react. And she decided to wait.
Unfortunately, everything that could go wrong eventually did. Not everything is the fault of the Fed. The conflict in Ukraine, the problems in China, the shortage of microchips, and the lack of containers are certainly not the fault of the Fed. The Fed’s guilt lies in its late response in starting to stem the rain of money. This error now has the consequence that the withdrawal of liquidity must surely be more aggressive than anticipated. Which is a huge blow to financial markets that rely heavily on the cheap money provided by the Fed to prosper.
Cryptocurrency investors are not particularly innocent when it comes to the Fed’s antics. After all, we have benefited quite a bit from the speculative boom created by that body. Now we are having to suffer the other side of the cycle. If the abundance of liquidity favors us, the scarcity harms us. On the other hand, it must be remembered that, in its brief history, Bitcoin has never experienced a recession. Indeed, it has experienced bearish cycles. But never a recession.
It is likely that in the coming months the Fed will be forced to take more aggressive measures to cool down the economy and lower inflation. If they go too far, they can cause a recession. If they are very passive, a crisis of stagflation (inflation without growth) can occur. I wouldn’t want to be in the shoes of Jerome Powell, chairman of the Fed, right now.
Due to the uncertainty, investors have chosen to protect themselves by getting out of volatile assets and taking refuge in more stable assets. Prices are going down. Which is actually an opportunity to buy. But it is important to organize very well. Because running out of fiat right now could be a mistake. Hope for the best, but prepare for the worst. The market may be overreacting. Indeed, we may have a better second half of the year. But nothing is certain in the world of finance. Caution is always advisable. Here things can be ant colored at any time.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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