Bitcoin falls as Powell signals readiness to push inflation higher

Bitcoin fell more than 2% to $11,200 after the speech by the U.S. Federal Reserve Chair Jerome Powell. As CNBC reported, he signaled the Fed’s readiness to let inflation run above the 2% target.

The U.S. central bank formally shifted to a policy of average inflation targeting.

Mr. Powell said that the “decisive” update would better support the labor market and the economy overall. In practice, this will mean a longer period of keeping the policy rate near zero.

The speech moved markets. At the time of writing, Bitcoin traded around $11,200, down 2.4% from the previous day’s close. The price of a Troy ounce of gold fell 1.2% to $1,930.

BTC/USD rate. BTC/USD. Source: TradingView.

Powell said that the neutral federal funds rate has declined significantly in recent years and will remain at this low level. This metric characterizes the level of the policy rate that neither restrains growth nor fuels inflation.

Powell noted that, unlike the situation four decades ago when his predecessor Paul Volcker sharply tightened monetary policy, inflation does not pose a threat today. He attributes this to demographics and new technologies.

“Many consider it illogical that the Fed would want to push inflation higher. Yet its persistently low level over an extended period could also pose serious long-term risks to the economy,” Powell said.

Powell and his colleagues say that the policy change will raise inflation expectations and create the conditions for inflation to rise to the 2% target.

One of the founders of the U.S. exchange Gemini, Tyler Winklevoss, said after Powell’s remarks that the dollar is no longer a reliable store of value.

Powell’s speech, in plain English:

“There is too much debt in the US & globally. It’s hurting growth. This can be resolved 1 of 2 ways:

1) Widespread defaults (including on sovereign debt)
2) Inflate it away

Today we are accelerating Option #2.” https://t.co/otarcQeTLW

— Luke Gromen (@LukeGromen) August 27, 2020

Экономист Люк Громен объяснил изменение политики ФРС отсутствием выбора. Он считает, что альтернативой разгону инфляции была бы серия широкомасштабных дефолтов, в том числе суверенных.

Powell’s speech, in plain English:

“There is too much debt in the US & globally. It’s hurting growth. This can be resolved 1 of 2 ways:

1) Widespread defaults (including on sovereign debt)
2) Inflate it away

Today we are accelerating Option #2.” https://t.co/otarcQeTLW

— Luke Gromen (@LukeGromen) August 27, 2020

In March the Fed cut the key rate to 0-0.25%. At that time, opinions in the Bitcoin community about whether Bitcoin could serve as an inflation hedge were divided.

In August, Nasdaq-listed MicroStrategy acquired 21,454 BTC (~$250 million at the rate at the time of the deal). The company regards Bitcoin as a more reliable alternative to a devaluing U.S. dollar.

At Fidelity Investments, which manages assets of $8.3 trillion, considers Bitcoin a hedge against problems in the traditional financial system. Its president has already filed with the U.S. Securities and Exchange Commission (SEC) an application to register a Bitcoin fund aimed at institutional investors.

Earlier, the author of the bestseller “Rich Dad Poor Dad” and entrepreneur Robert Kiyosaki said that the Fed and U.S. Treasury actions bring a serious banking crisis closer and that it is time to invest in Bitcoin.

Read about the Fed’s policy during the pandemic and the current economic crisis in our articles here, here, and here.

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