The U.S. Federal Reserve is engaged in a veritable campaign to combat skyrocketing inflation. A campaign that may last until the moment you have to write down large losses by your bitcoin and crypto.
Federal Reserve policy has been at the center of financial markets since the beginning of 2022. The world’s leading central bank has the power to pretty much determine the fate of the markets, at least in the short term.
If they come out with an announcement tomorrow that interest rates are going to come down, prices will shoot up and vice versa.
Now, however, we are at a point where they want to do everything they can to bring inflation down to 2 percent.
For most of this year, the Federal Reserve has still been fairly clear about the future. Now, however, we are at a point where they are looking at the development of the economy from day to day.
As long as it can hold up they are raising interest rates to get inflation down. How long that will take and how high interest rates should be to do that, no one knows, so there is great uncertainty in the market at the moment.
Why is higher interest rates troublesome for bitcoin?
Higher interest rates are problematic for bitcoin because interest rates at the Federal Reserve are risk-free. You can buy U.S. government bonds and earn guaranteed Federal Reserve interest on them.
That interest rate is not extremely high, but especially if the markets are not stable, then it is very attractive to choose that.
Even if the interest rate on government bonds is 2 percent and inflation is at 8 percent, then it can be attractive to choose that if all the stocks and crypto stocks are falling sharply.
This is why bitcoin and stocks qualify as risk assets, they are financial products that offer no guaranteed return. Unlike government bonds which do.
After all, the U.S. Federal Reserve can print unlimited dollars, so they will pay out those interest rates.
Once uncertainty in the economy increases and people worry about their ability to pay the bill, it makes sense that there would be a flight to fiat money.
How is the economy doing?
So all eyes are now on the U.S. economy. On September 13, the new inflation figures will be published, which are an important factor in the Federal Reserve’s policy.
They are expected to drop slightly from last month’s 8.5 percent, but there is little chance of an extreme drop. Meanwhile, the U.S. job market is doing very well, as another 300,000 new jobs were added in August added.
That gives the Federal Reserve room to use interest rates as a tool to fight inflation.
“The Federal Reserve wants to make people who own financial assets think about their purchases and reduce demand. It’s a dangerous game. They want to bring the market down, but if they go too far, things can explode”, said Jim Bianco of Bianco Research on Federal Reserve policy.