FRS statement devalued risky assets
In response to the Jerome Powell statements, the price of bitcoin fell by 2% in a few minutes to below $22,000.
Powell’s message was clear:
“The most recent economic data is stronger than expected, suggesting that the final interest rate level is likely to be higher than previously expected.”
The central banker made these statements in preparation for two meetings at Capitol Hill.
“If the totality of the data indicated that a faster tightening is warranted, we would be prepared to step up the pace of interest rate increases.”
With monetary tightening, Powell is talking about the opposite of Quantitative Easing (QE). Tightening in this case, in which less new capital enters the market at the hands of the Federal Reserve.
The central bank has been working on this for some time in the hope of taming rising inflation. This has partly succeeded, the peak seems to have been reached. The only question was whether the economy would be able to withstand these interest rate increases, or whether a recession would lurk. Powell says it is going very well.
The central bank’s leader is now even warning of tighter monetary policy than expected. These comments have (at least) two implications:
The peak of the Federal Funds rate is likely to be higher than what officials previously thought.
Last month’s lower rate hike compared to the previous month was likely an incident and not the beginning of a policy reversal.
Powell did not specify how high he thinks interest rates will eventually rise. Currently, the base rate is at 4.5% -4.75%.
These statements have its impact on bitcoin. At higher interest rates, the riskiest assets are usually sold first (because it is more profitable to ‘just’ start saving instead of investing) and also because less new money flows into the market.
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