U.S. Fed Chair’s Speech: A Sleeper for the Crypto Market?

28 Aug, 2020

So what did the U.S. Federal Reserve Chairman Jerome H. Powell’s speech mean for the cryptocurrency market?

Not much, if you look at the immediate reaction to the text of the speech.  Ho hum, some pundits said in the post-mortem.  Others pointed to the immediate market reaction by Bitcoin and gold, which both dipped during the speech only to rise again, along with the U.S. financial markets, when the speech was done.

But if you dig a little deeper,  it’s a comment  the chairman made after the speech that provides real context for investors in the digital currency market:

“Public faith in large institutions around the world is under pressure,” Mr. Powell acknowledged in a question-and-answer session after the speech, which was delivered virtually during an annual symposium titled "Navigating the Decade Ahead: Implications for Monetary Policy," sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. “Institutions like the Fed have to aggressively seek transparency and accountability to preserve our democratic legitimacy.”

He could have been talking about governments. Or he could be talking about the world’s large financial institutions. Or both. And if anyone is looking for transparency and accountability, just look to the blockchain-based currencies in the digital market, a fan of Bitcoin might argue.  But while the cryptocurrency universe may offer an obvious solution, the fiat-currency based central bank is still large and in charge in driving the U.S. Economy.

Breaking it down, here’s what the Fed announced:

The Fed said it would keep interest rates near zero and will tolerate what some call an “average inflation” policy, meaning it’s willing to let inflation rise above 2% for a short period of time while as the U.S. economy continues to struggle with recovering from the economic impact of the Covid pandemic.

The country’s central bank has gone to great lengths during the pandemic to support businesses and individuals by implementing stimulus programs and keeping interest rates low.

“With interest rates generally running closer to their effective lower bound even in good times, the Fed has less scope to support the economy during an economic downturn by simply cutting the federal funds rate,” Powell said. “The result can be worse economic outcomes in terms of both employment and price stability, with the costs of such outcomes likely falling hardest on those least able to bear them.”

The change might “appear subtle,” he noted, “but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”

The U.S. financial markets responded to the news by driving the already high-flying fiat markets even higher, which is not surprising, said Brian Chappatta, a Bloomberg Opinion columnist, in his commentary.

“This largely serves to support financial markets by making it cheap for large companies to borrow and pushing investors into riskier, higher-yielding assets. The Fed can’t so easily reach the small businesses and service workers most impacted by this economic slowdown,” he said.

Bill Barhydt, the CEO of Abra, told Cointelegraph that the Fed’s move ”is fueling the sentiment around Bitcoin.” He added: “Bitcoin doesn’t need the Fed to succeed but if they insist on throwing gasoline on the fire then so be it.”

Gemini co-founder and CEO @tylerwinklevoss weighed in before the speech, saying “the Fed, under the leadership of Jerome Powell, continues to be #Bitcoin’s biggest booster.”

Winklevoss’s pronouncement ahead of the speech that Bitcoin was moving toward a $500,000 markup and would overtake gold as a safe haven seemed to get more attention in the crypto world that Powell’s speech.

Nevertheless, at this point, the Fed’s shift in inflation strategy has greater impact on the U.S. economy as the majority of citizens rely on fiat currencies to pay the bills.  As long as the fiat financial markets keep humming and companies slowly get back on their feet, the long-term impact of the Fed’s new strategy may be a blip on the crypto screen.  Or is it more?

“Central bank credibility is crucial, said Tom Graff, head of fixed income at Brown Advisory ahead of the speech in an interview with CNBC. “Currently, they don’t have any credibility that they can or are willing to allow inflation to be higher than 2%, and that’s a problem.

“Actions are going to speak louder than words. The market’s going to have to see them not hike interest rates even as unemployment gets much lower before they’ll believe it.”

Score one for the Fed.

Joyce Pavia Hanson
Contributor

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