The U.S. Federal Reserve will publish its economic forecast today, addressing the bond-purchase program and interest rates.
The market expects the central bank to maintain its liberal stance to support inflation and economic growth.
Bitcoin, gold and stock markets could experience negative price movements if the Fed changes its outlook.
Share this article
The U.S. Federal Reserve will conclude its policy meeting today and release an economic forecast report pinning down expected growth and interest rates.
Markets in Anticipation
Markets globally are eagerly waiting for the Fed’s announcement on bond purchases and the timeline for increasing interest rates.
The Fed has been buying up the treasury and corporate bonds at cheap rates to provide liquidity to the U.S. economy after COVID-19. But in doing so, it has been increasing inflation and debt in its balance sheet. Since the COVID-19 recovery began, the Fed has shown no sign of slowing down purchases before early 2022.
In its last meeting, the Federal Open Market Committee suggested that it could start a discussion on tapering the $120 million monthly bond purchases “at upcoming meetings.” Any plans to slow down purchases by Q3 this year could drive down stock prices and increase treasury yields, and negatively affect the value of inflationary hedges like Bitcoin.
Moreover, the Fed sets the base interest rate to lend money to other banks. An increase or decrease in this rate causes huge shifts in the economy as borrowers readjust their investment strategies. For instance, if the Fed were to increase interest rates at this point, the treasury yields would spike, and investors would likely dump stocks for high-yielding bonds. This is a similar effect to bond purchase tapering.
The Fed’s Dot Plot and Chairman’s Address
Two important things to watch out for are the Fed’s Dot Plot of its economic forecast and the tone Fed chairman Jerome Powell sets for global markets. Powell will address the media after the meeting.
The Board of Governors and the regional presidents quarterly fill out the projections for this year, the next two, and the long-term projection beyond 2024. The aggregate results are published on the FOMC “projected appropriate monetary policy” table and plotted as the “Fed’s Dot Plot,” which has been key in driving market sentiments.
According to last quarter’s estimate, the Fed has no plans to increase rates before 2024. However, this time, more dots on higher values of 2023 could worry risk-prone investors.
The annual consumer price index, a proxy for inflation, projections reached 5% for all items and close to 4% excluding food and energy last month, the highest in a decade.
How Powell addresses inflation is crucial. Until now, the Fed has planned to continue the purchases for the better part of this year. Moreover, in last quarter’s address, Powell said that the Fed would “not seek inflation that substantially exceeds 2%.”
Bitcoin’s Reaction to Macro View
Recent activity suggests that the market does not expect a change in the Fed’s stance before August’s Jackson Hole Economic Symposium. The recent bullishness in stocks and the weakness of the dollar have exhibited this trend.
On the other hand, Bitcoin and the rest of the crypto market have largely remained non-correlated with traditional assets.
Over the last year, Bitcoin’s correlation with the stock market has been stronger than gold. But the magnitude of the correlation since last year has been weak at around 0.26 (a correlation above 0.5 is considered a strong positive correction). The one-year daily correlation with gold was 0.2.
Overall, many analysts have inferred that Bitcoin price moves are independent of the stock market and commodities, but driven by adoption. Nevertheless, the cryptocurrency has exhibited an impulse reaction to macro announcements in the past, and COVID-19 significantly shaped its investment thesis.
Some hedge funds have started to view Bitcoin as an appropriate inflationary hedge. Still, the price volatility has helped it perform closely to stock markets as a risk-on asset.
Bitcoin and gold have been moving in opposite directions since last month. At the same time, the S&P 500 and NASDAQ 100 indices recorded new highs.
Bitcoin’s reaction alongside gold and the stock market after Fed’s announcement could be a strong indicator of its short-term narrative as an inflationary hedge or risk-on asset. BTC has tumbled just below $40,000 today, last trading at $39,183.
Share this article
The information on or accessed through this website is obtained from independent sources we believe to be accurate and reliable, but Decentral Media, Inc. makes no representation or warranty as to the timeliness, completeness, or accuracy of any information on or accessed through this website. Decentral Media, Inc. is not an investment advisor. We do not give personalized investment advice or other financial advice. The information on this website is subject to change without notice. Some or all of the information on this website may become outdated, or it may be or become incomplete or inaccurate. We may, but are not obligated to, update any outdated, incomplete, or inaccurate information.
You should never make an investment decision on an ICO, IEO, or other investment based on the information on this website, and you should never interpret or otherwise rely on any of the information on this website as investment advice. We strongly recommend that you consult a licensed investment advisor or other qualified financial professional if you are seeking investment advice on an ICO, IEO, or other investment. We do not accept compensation in any form for analyzing or reporting on any ICO, IEO, cryptocurrency, currency, tokenized sales, securities, or commodities.
See full terms and conditions.
“Be Right, Not First,” Says Fed Chairman Powell on a Digit…
“We have not made a decision to issue a CBDC,” said Fed Chairman Jerome Powell in his speech during today’s International Monetary Fund (IMF) event devoted to the cross-border payments….
What is Polygon (MATIC): Ethereum’s Internet of Blockchains
In terms of both decentralized app (DApp) development and adoption, no blockchain has been more successful than Ethereum (ETH). But despite its relative success, the Ethereum network still contains several…
Bitcoin Critic and Economist Janet Yellen Set to Lead U.S. Treasury
According to the Wall Street Journal, former Federal Reserve Chair Janet Yellen could become the next Secretary of the Treasury. President-elect Joe Biden has nominated Yellen for the position. Yellen’s…
Bitcoin Is Decoupling From Stocks, “Safe Haven” Back in Pl…
Bitcoin has been moving in lockstep with the S&P 500 for the last two months, shocking investors and analysts alike. Despite a dire warning from the Fed, BTC has been…