The Fed cut its benchmark interest rate by three-quarters of a percentage point after two days of tumult in international markets due to fear of a recession in the United States.
Amidst the brewing of a worldwide pandemic and global financial crisis, the Federal Reserve called an emergency meeting where it announced a rate cut to zero and launched a massive $700 billion quantitative easing program.
Equity markets are breaking all time highs on a daily basis, with over $600 billion flowing into global equity funds as of August 2021 .
Over the past year and a half, we’ve seen one of the greatest creations of wealth in human history, catalyzed by trillions of dollars of monetary and fiscal stimulus across the globe.
The thesis for transitory inflation is simple – COVID induced supply chain shortages, combined with pent up consumer demand for services have temporarily inflated prices.
On the other hand, some argue that we are headed for a significant period of higher inflation due to a demand shock induced by the Fed’s accommodative monetary policy.
The Fed is hence always playing a balancing act – cutting interest rates to stimulate the economy when unemployment is too high and hiking rates to combat inflation when the economy is overheated.
As inflation has been ticking up over the past few months, the Fed has been forced to react.
The big question now becomes when will the Fed begin to hike interest rates? While the market is pricing in two hikes by the end of 2022, Fed officials are currently much less aggressive in their expectations.
The implications of the broader macro environment and inflation concerns on Bitcoin are two-fold.
Bitcoin price has been tracking US 10 year yields over the past year.
As larger asset managers and institutional investors allocate more capital towards the crypto ecosystem, this is a trend we can expect to continue going forward.
While the “inflation hedge” thesis should be supportive of Bitcoin prices, its increasing correlation with risk assets could cause significant downward price pressure as the tightening of monetary policy causes valuations to collapse across the board.
The ultimate goal of Bitcoin was to create a decentralized currency, shielded from the monetary policy of any central bank.