- A new high for CPI, 5.4% year-on-year
- Bitcoin questioned as safe-haven during inflation
- Powell says risks are manageable
YEREVAN (CoinChapter.com) — Bitcoin (BTC) prices reclaimed $32,000 after dropping towards $31,000 in the early Wednesday session. The latest upside move came as Federal Reserve Chairman Jerome Powell said in his congressional testimony that the central bank would not taper its expansionary policies despite the newest uptick in US inflation data.
The US consumer inflation index (CPI) has seen an unprecedented increase in 13 years, causing a 5.4% year-on-year inflation that has the market breaking out in cold sweat. However, Powell has been pushing the narrative that the upswing over-and-above expected amounts to are short-term phenomena after post-pandemic recovery.
Why is inflation rising?
The Fed’s inflationary monetary policy supported the US economy throughout the coronavirus pandemic. But with the US reopening and the economists predicting faster-than-expected recovery from the pandemic-led recession, the central bank could decide to end its expansionary policies, including near-zero lending rates and a $120bn monthly bond-buying program.
Powell nonetheless wants to continue the support until the US economy achieves maximum employment.
As a result, tapering dovish policies is not in the works yet. However, Powell reassured that “forecasters have a lot to be humble about,” adding that policymaking “is a highly uncertain business.”
“We’re very much attuned to the risks and watching the data carefully.”
The uncertainty is perhaps the highest common factor with Bitcoin and other cryptos right now.
Inflation expectations are also rising as Treasury Inflation-Protected Securities (TIPS) yield jumped to 2.59%, Reuters reports. Ahead of Powell’s testimony, all yields jumped to reflect the market’s uncertainty for the dollar.
When asked about the persisting trend on Tuesday, Powell reassured the Fed is ready to tame the horse if the transitory scenario does not play out, Financial Times reports. But what does this mean for cryptocurrencies?
How is it connected to Bitcoin?
Historically, the US dollar’s weakening served as a bullish cue to Bitcoin. As inflation rose, investors turned to alternative money for hedging. Nevertheless, this relationship has not played out since 2020. When CPI fluctuated in a tame range, between 1.4-1.7%, the BTC price jumped to its all-time high. Now, the dollar flopped at a monthly 0.9% rate, while Bitcoin shows no sign of rally as its price stick to the lower end of the $31-33k band.
At press time, the Bitcoin price was over $32,000. Nevertheless, compared to the CPI rate, its rebound from $30,000 is hardly a definitive catch-up. Analysts at Fortune have started questioning the “safe-haven” theory of Bitcoin (and other digital coins alike) even before the big slump. Even back in February, the lack of co-movement between indices prompted them to believe that “Bitcoin marches to its own drummer.”
Taking inflation as a signal for future prices in cryptos is no longer an effective strategy for speculators. As for market-watchers, they are holding their breaths to spot persistence in the CPI trend. It will hit the pockets hard if the Fed does not deliver effective mechanisms in time.