PUNE (CoinChapter.com) — Jurrien Timmer, Director of Global Macro at Fidelity Investments, shared a series of tweets suggesting the departure of the Federal Reserve’s interest rate policy for 2022 from any relevant and practical real-world application for the investor.
The executive noted that even if the U.S. central bank cuts interest rates by 200 basis points in 2022, it would still be unable to push inflation — which is currently at 7% year-on-year — to its 2% target. Excerpts from his statement:
“Even with 200 basis points of tightening priced in, if the current 7% inflation rate reverts back to 3, the terminal rate will still end up well below neutral (-1.5%). That would hardly be a restrictive monetary regime.”
The Terminal Rate Angle
Terminal rate, also known as the natural rate of interest, is the interest rate that supports the economy at full employment/maximum output while keeping inflation constant.
The Fed, per se, does not forecast a terminal rate, but the market’s expectation of when the current hiking cycle will peak is well below its view of 2.5% and lower still than the revised core inflation estimate of 2.6% next year.
Since the Federal Open Market Committee released its policy statement in December 2021, markets have priced the terminal rate where policy rates will stop going up, at between 1.4% to 1.7%, according to Euro-USD futures’ view ofU.S.. rates in three years.
Differing opinions on the pattern
Crypto-keys.com, through its Twitter, handle MASTERBTCLTC, proposed an alternate interpretation of the interest rate charts shared by Trimmer.
Suggesting that the busts in 2001 and 2007 came after touching the upper trend-line, which is still not the case now, MASTERBTCLTC said:
“It looks like we have lots more room to run. The Federal Reserve will sound a bit more dovish when they meet next week. The economy isn’t as overheated as they estimated. Markets will rebound nicely on the news.”
What’s on the cards for Bitcoin (BTC)?
The analysis came along with an outlook for Bitcoin (BTC) in 2022.
Historically evident, the Fed interest rates have an opposite effect on Bitcoin. Headlines suggesting the FED’s need for four interest rate hikes in 2022 to contain the 40-year high inflation have hit the cryptocurrency prices lately.
From an all-time high of $69,000 levels in November 2021, Bitcoin (BTC) has lost around 39% to trade around $41,906 apiece today.
With the notion of negative real interest rates to continue throughout 2022, Bitcoin (BTC) and other digital assets would exercise the favorable market conditions and solidify their positions as an alternate asset class suited for respite against fiscal inefficiencies.
“Perhaps that will change if the Fed, getting closer to 2%, decides to move the goalposts. But at this point, the Fed’s hawkish pivot looks fairly benign”, added Timmer.
