Fed Chair Powell’s Hawkish Stance on Inflation Could Hurt Crypto

The United States Federal Reserve raised interest rates for the first time in more than three years about a week ago, and bitcoin (BTC) is still trading above the $40,000 mark

Analysts believe the Fed’s resiliency will be put to the test if it continues to its objectives to remain hawkish until inflation is under control.

The largest cryptocurrency by market capitalization certainly reacted favorably to the Fed’s March decision, implying that some traders utilize bitcoin as a hedge against inflation and rising prices.

Jim Powell’s Hawkish Speech Unable To Derail Bitcoin

BTC is still up 8% from a week ago, changing hands at $42,524.50, despite Fed Chair Jerome Powell’s speech this week being seen as one of his most hawkish ever. On Monday, Powell told the National Association for Business Economics that it was clear that monetary policy needed to be “moved swiftly” to a more “neutral level.”

But, in the long run, the Fed’s hawkish posture may depress crypto values, just as it is expected to depress equity markets.

“Crypto is performing more like a risk asset than an inflation hedge,” said Marc Chandler, managing director and chief market strategist at Bannockburn Global Forex, on CoinDesk TV on Tuesday.

Bitcoin has been moving in lockstep with traditional stock markets in recent months, and it is down over 30% in the previous year, despite inflation reaching a four-decade high.

According to the Federal Open Market Committee’s (FOMC) quarterly economic predictions and “dot plot,” the median long-term forecast for the Federal Funds Rate is 2.38 percent, which the Fed considers to be the “neutral” rate, one that neither stimulates nor restrains economic growth.

However, the Fed expects the rate to reach 2.75 percent in 2022 and 2023, implying that they’re willing to go above what they consider to be neutral in order to keep inflation in check next year.

Conclusion

Economists have long argued that the central bank’s first aim should be economic growth, as in increasing employment.

The focus has shifted in the last year, as Powell confessed that the Fed “widely misjudged” inflationary pressures. Inflation is a major concern right now, even if it damages the market.

Traditional financial markets are becoming more linked to crypto as more mainstream institutional money flows into it. As a result, crypto trading now has a stronger association with the stock market than before.

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