What could Federal Reserve’s potential 25 basis rate spike this year mean for pandemic winner Bitcoin

What does Federal Reserve's potential 25 basis rate spike this year could mean for pandemic winner Bitcoin
What does Federal Reserve’s potential 25 basis rate spike this year could mean for pandemic winner Bitcoin

PUNE (CoinChapter.com) — A majority of the 45 economists surveyed by Bloomberg predicted that the U.S. Federal Reserve would increase its benchmark interest rates by a 25 basis-point following its 25-26 January policy meeting. They expected the decision to come into effect by March, after an asset run-off to contain the Federal Reserve’s swelling balance sheet of $8.86 trillion.

Bitcoin (BTC), however, is in the safe zone even against a 200 basis-point hike in 2022, quoted Jurrien Timmer, Director of Global Macro at Fidelity Investments.

Federal Reserve's potential rate hike plan. Source: Bloomberg
Federal Reserve’s potential rate hike plan. Source: Bloomberg

Much of next week’s meeting will be centered around how and when to normalize the policy following almost two years of near-zero interest rates and massive asset purchases in response to the Covid-19 pandemic.

The notion of four or more rate hikes being imminent to achieve the target 2% inflation in 2022 starts to resonate with the Federal Open Market Committee (FOMC) outlook for March revisions. For instance, Anna Wong, chief U.S. economist at Bloomberg LP, noted that the Federal Reserve’s March rate hike looks like “a done deal” and would become a step up towards more tightening measures against inflation for the rest of 2022.

Excerpts from her coverage:

“By mid-year, we expect the FOMC will recognize that they still will need to do more to give the best chance of ultimately achieving their 2% target. As a result, the committee will likely hike five times this year (all 25 basis points).” 

Anna Wong, chief U.S. economist 

Would take about a decade to restore the pre-Covid-19 balance sheet

In December, the FOMC doubled its pace of tapering of asset purchases, now scheduled to bring the bond-buying program to a close in March. 

Next in line — as per the 40% majority amongst the economists surveyed — would be the Federal Reserve commencing the run-off of maturing securities. Again, the median economist estimate looked for monthly reductions between $40 billion and $59.9 billion.

As a result, the Federal Reserve-led run-off would bring the size of the balance sheet down to $8.5 trillion at the end of this year and $7.6 trillion at the end of 2023, still far above pre-pandemic levels.

The calculation translates to roughly a decade of negative real interest rates, to follow, for the United States.

Federal Reserve’s tapering tantrum would boost Bitcoin demand

Timmer noted that “even with 200 basis points of tightening priced in, if the current 7% inflation rate reverts to 3, the terminal rate will still end up well below neutral (-1.5%). So that would hardly be a restrictive monetary regime”.

The consistent lack of returns in the mainstream economy would, in effect, compel investors to look for alternative asset classes that are decoupled or benefitted from the inefficient fiscal governance. Digital currencies like Bitcoin (BTC), although struggling in recent times, are poised to benefit from the lack of juice in traditional markets.

U.S. monetary policy. Source: Fidelity
U.S. monetary policy. Source: Fidelity

“The Federal Reserve has moved from being patient to panicking on inflation in a record period of time,” Diane Swonk, chief economist at Grant Thornton LLP, said in a survey response.

That is the first time the Federal Reserve has chased inflation instead of pre-empting it since the 1980s. However, the stance beholds the risk of getting overzealous on the fight against inflation — and hitting the brakes too hard on monetary policy.

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