Fed Speeds Up Stimulus Withdrawal, and Bitcoin Jumps
Federal Reserve officials took steps to accelerate the withdrawal of the unprecedented monetary stimulus used to prop up markets in the wake of the coronavirus, acknowledging the growing threat of inflation now at a 39-year high.
The Federal Reserve meeting was being closely watched by digital-asset traders, since many bitcoin investors see the cryptocurrency as a hedge against the potential debasement of the dollar that might result from the monetary stimulus, which is facilitated by Fed money printing. So a faster withdrawal of the stimulus might provide an extra headwind for bitcoin prices.
But bitcoin (BTC) prices jumped after the Fed decision was announced at 2 p.m. ET (19:00 coordinated universal time), signaling that traders may have been worried about an even more aggressive withdrawal of the stimulus and faster interest-rate increases next year. The bitcoin price had fallen 15% just in December alone.
As of press time the largest cryptocurrency was up 3.7% over the past 24 hours to about $48,700.
According to a statement Wednesday, the Fed will double the pace of tapering its monthly bond purchases, reducing them by $30 billion every month until they’re completely wound down early next year. Under the Fed’s previous plan, it would have withdrawn $15 billion of the stimulus every month to wind down the program by the middle of next year. For most of the past couple years, the Fed has been printing money to buy about $120 billion of bonds a month.
A quicker wind-down of the asset purchases could allow the Fed to proceed more quickly to start raising interest rates for the first time since 2018. After the spread of the coronavirus in March 2020 began to hit global markets and economies, the Fed cut interest rates close to zero and has held them there since.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” the Federal Open Market Committee, as the Fed’s monetary-policy committee is known, said in the statement.
At a press conference on Wednesday after the decision was announced, Federal Reserve Chair Jerome Powell said that the asset purchases would end by mid-March, a few months earlier than communicated just last month.
“The economy no longer needs increasing amounts of policy support,” Powell said.
The Fed said Wednesday it would keep the benchmark U.S. interest rate for now in their current range between 0% and 0.25%.
Some traders and economists have referred to the Fed’s recent tilt toward becoming more hawkish – more aggressive in fighting inflation – as the “Powell pivot.” That refers to Powell’s repeated assurances for seven months earlier this year that inflation was “transitory.”
Powell and other officials at the U.S. central bank repeatedly used that term to suggest that the forces driving recent consumer-price increases might abate as the economy accelerates from coronavirus-related lockdowns.
But the U.S. Consumer Price Index – a key gauge of inflation – climbed to 6.8% in November from 12 months earlier, the fastest in 39 years.
And on Nov. 30, Powell said during a U.S. Congressional hearing that it was time to retire the term “transitory.”
The largest cryptocurrency is viewed by many investors as a hedge against inflation – based on the idea that its supply is tightly controlled by the programming built into the underlying blockchain. That hard-coded process is contrasted with the human-decided monetary policies of the Federal Reserve, which has ballooned its balance sheet to about $8.7 trillion, more than double where it stood in early 2020.
But bitcoin is also seen as a risky asset, so there’s also a view among traders that loose monetary policies encourage investors to make bigger speculative bets. A reversal of these “dovish” policies might prove a tailwind for bitcoin.