Key Highlights:
- FED’s inconsistency with the estimation of the natural rate of unemployment lead to stretched expansionary policies that helped fuel inflation
- Higher inflation induces capital flight to alternate assets, favouring cryptocurrencies such as Bitcoin(BTC)
- Lack of pre-emptive approach to tackle inflation
PUNE (CoinChapter.com) — Battling historically high inflation exceeding 6%, the U.S. Federal Reserve finds itself disconnected and ineffective with its policy repertoire.
The departure paves way for the capital flight to unconventional stores of value such as Bitcoin (BTC), gearing it up for the $100,000 rally. In Oct. 2021, dismissing the global supply jitters induced inflation as ‘transitory’, the Fed again seems wronged by the rising local demand and concerns of Omicron’s outburst. What should ideally have been a pre-emptive approach to tackle the upsurge in inflation levels, has now become largely reactionary.
“If inflation concerns persist in 2022, more investors might seek out Bitcoin as an alternative to their cash, which could help send it toward that $100,000 goal line. The coin is heading toward $100,000. Becoming a global reserve asset, Bitcoin may be a primary beneficiary in that scenario,”
said Bloomberg Intelligence’s Mike McGlone.
Why is Fed monetary policy behind the curve in tightening monetary policy to control inflation?
While the Fed conveniently outdated the Phillips curve, citing unemployment levels below its natural rate suggests that higher employment rates no longer help fuel inflation higher. However, research presented by the former Fed governor Fredric Mishkin, with co-authors at the U.S. Monetary Policy Forum, suggests that the Phillips curve is not dead, but rather is hibernating.
Mishkin suggests:
A lower correlation between unemployment and inflation depends on the Fed taking pre-emptive strikes against rises in inflation, a policy that it has now abandoned. Instead, the Fed has committed to keeping monetary policy loose until full employment has been reached”.
A summary by the policy-setting Federal Open Market Committee (FOMC) of economic projections suggests this will occur at a natural rate of unemployment of around 3.5%.
However, several other indicators of labor market tightness, as the high number of unfilled jobs and rising wages, hint that we have already hit full employment. As such the natural rate of unemployment should settle above the 3.5% target. This incremental monitory stimulus proves unnecessary, plugging in more capital than required, and further degrading the value of the U.S. Dollar.
Market analysts at Goldman Sachs expect Bitcoin (BTC) to hit $100,000 if it continues to take market share from gold.
“As witnessed in major economic upheavals since 2008, every such unwanted dollar in stimulus takes investments capital away from the central banking system and benefit digital currencies such as Bitcoin(BTC) as an alternative store of value,”
wrote Goldman Sachs investments analyst Zach Pandl.
Inability to factor in supply-demand shocks
Lack of research and planning on supply and demand shocks arising beyond borders/authority.
The Fed has opined that the inflation surge would be short-lived on the extensive negative supply shocks that Covid-19 has subjected the economy to. Although negative supply shocks are surely one source of the surge in inflation, the Fed has not paid enough attention to very strong positive demand shocks.
“Latent demand from households accumulated during the pandemic restrictions and the expansionary fiscal policy promoted by the Biden administration has led to high demand for goods and services,” noted Mishkin, adding:
“It is true that inflation will be temporary when it is the result of supply bottlenecks that dissipate over time. But strong positive demand shocks result in persistent high inflation, which is what we are experiencing currently.”
Loosely practiced Inflation Targeting Framework
The Fed has been reluctant to declare the horizon for the average inflation target, which in effect makes the current 2% inflation target less credible.
A long horizon means that inflation can stay above the 2% level for a very long time without raising the average very much. Inflation expectations have now become unanchored, which makes persistent high inflation a much likelier possibility.
‘Although the U.S. CPI inflation should recede from its current level of 6.8 percent as supply jitters from pandemic reduce, it will continue to substantially exceed the Fed’s target. The Fed needs to recognize the flaws in its monetary policy framework and return to more pre-emptive policies to control inflation,”
said Mishkin.
The reluctance or inability to tame inflation will continue increasing the adoption of digital currencies, harnessing a pent-up demand surplus for Bitcoin (BTC) in the near term.
“We are very bullish on Bitcoin hitting the $100K mark in 2022 and digital assets cutting through all the noise, day-to-day,” said Mishkin, adding:
“Digital assets will be treated longer-term like commodities, equities and bonds, and real estate, and other more traditional asset classes in the years to come.”
