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FED Monetary Policy and Bitcoin

FED Monetary Policy and Bitcoin

Learn about possible scenarios for Bitcoin amid the Federal Reserve’s (Fed) current stance on monetary policy.

FED Monetary Policy and Bitcoin. As widely expected, the January meeting of the Federal Open Market Committee (FOMC) left the federal funds rate unchanged. This decision by the Fed’s top representatives leaves a curious outlook for Bitcoin and the cryptocurrency broad market. The FOMC meeting was the fourth one in a row in which interest rates remained unchanged. In that sense, they remain unmoved in the 5.25-5.5% range, the highest state in the last 23 years. They applied the recent 25 basis point increase during the July meeting.

The impact of this macroeconomic situation on the price of BTC could be formidable, considering that the currency is now on the stock exchange. Thus, if they confirm a first-rate cut for March, the scenario for the cryptocurrency could be highly positive. One should start from the fact that we can interpret the start of the cuts as a victory for the Fed in the face of inflation. On the other hand, if policymakers decide that the economy is too hot to cut rates anytime soon, the result would be the opposite. Consequently, keeping rates higher for longer means increasing the risk of recession in the U.S. The latter translates into capital fleeing risky assets such as Bitcoin spot ETFs.

Is Bitcoin tied to Fed decisions?

The relationship between the Fed and Bitcoin is closer since the SEC approved exchange-traded products linked to this cryptocurrency. In that sense, any monetary policy move will impact the exchange value of Bitcoin as long as the same depends on ETFs. In simple words, if the price of Bitcoin has the inflows to ETFs as the leading driver of its price, then it could be at the mercy of monetary policy. Either way, the decision to keep the cost of money immovable at this January meeting carries no weight for Bitcoin.

It is now worth looking for clues from Fed officials about the monetary policy timeline. In December, Jerome Powell previewed that they could implement one to three cuts in 2024. However, the positive numbers from the labor market, retail consumption, and GDP become a worrying sign. Thus, the central bank runs the risk of reviving inflation if it rushes with rate cuts. In parallel, keeping the rate high for a long could generate an economic contraction. According to the FED’s latest scenario, Bitcoin’s price seems compromised. Meanwhile, the ideal scenario would be a soft landing, but this phenomenon is historically one of the least likely.

This setup is one of the most complex to predict. Powell himself stressed again that they make decisions according to the macroeconomic figures of the moment.

What do the experts say?

Wall Street experts split the chances of a rate cut or hold on March 20. For some Fed officials, there is little urgency in cutting the federal funds rate. Wednesday’s report showed changes in the Fed’s outlook. For example, they abandoned the narrative that further hikes were on the table and adopted the position of necessary cuts. Despite this, they noted that such rate cuts are not imminent. At the press conference afterward, Powell cooled the mood somewhat.

“I don’t think it’s likely that the committee will reach a level of confidence” to warrant a cut in March, he said. The central bank’s narrative centered on no cuts until there is a forceful movement of inflation toward the 2% target. Thus, the conditions seem ripe for the Bitcoin price to react to the Fed’s next moves. In the meantime, if the coming announcements do not change anything, some downward pressure for this currency may be present.

What is Monetary Policy?

The monetary policy refers to the actions taken by a country’s central bank to manage the money supply and credit in the economy. It’s essentially a set of tools used to achieve specific economic goals, typically focused on:

1. Stabilization of price: Keeping inflation under control, aiming for a low and stable level of price increases, helping to maintain the currency’s value and prevent excessive inflation from deteriorating purchasing power.

2. Maximize employment: Promoting economic conditions to boost job creation and full employment. Job promotion involves ensuring enough economic activity to support a healthy labor market.

3. Moderate long-term interest rates: Balancing the need for affordable borrowing costs for businesses and individuals and the need to manage inflation.

Central banks achieve these goals by using various tools:

1. Interest rates: Raising or lowering interest rates affects borrowing costs and spending decisions. Lower rates generally stimulate borrowing and spending, while higher rates slow them down.

2. Open market operations: Buying and selling government securities in the open market affects the money supply. Buying securities injects money into the economy while selling them removes it.

3. Reserve requirements: The regulation requires banks to hold reserves. The amount can affect their ability to lend money. Changing these requirements can influence the money supply and credit availability.

It’s important to note that the specific goals and tools used for monetary policy can vary between countries and central banks. Monetary policy interacts with other government policies, such as fiscal policy, and can have complex effects on the economy. Global economic conditions and market expectations can severely affect the efficacy of monetary policy.

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