Erik Weijers, 2 months ago

Between the Fed and a hard place: Wednesday's tough interest rate decision

Will the American Central Bank on March 22 raise interest rates with another 0.25%? In a banking sector that's under severe stress, even higher interest rates could squeeze banks and even undermine trust in the entire financial system. At the same time, inflation hasn't come down to the target of 2%, which demands more interest rate hikes - at least in the opinion of the Fed. 

In recent weeks, five banks have gone under, one of which is titan Credit Suisse. (It's ironic, as the former CEO of Credit Suisse once said Bitcoin was a bubble. The Bitcoin price was 7 thousand dollars at the time. Currently, the market cap of Bitcoin is worth two hundred times more than the price at which Credit Suisse was bought up by competitor UBS... revenge is a dish best served cold.) 

Jerome Powell's dilemma

There is not really much time to linger on these feuds. The markets are looking forward to coming Thursday. Not just for the interest rate number but also for chairman Jerome Powell's speech. How will he outline the path forward? 

Powell will have to take the stress in the banking sector into acccount. It has made financial conditions drop sharply. Bloomberg's financial conditions index basically measures how easy it is to borrow. If these conditions are bad, this has a depressing effect on the economy: it's deflationary. That's good, right, because inflation has to come down? 

The problem with the Fed's efforts to get inflation down is that it relies on data that lag the rapidly unfolding events. The effect of a banking crisis on inflation data will only be visible in a few weeks or months. Also, job data which the Fed relies on tend to lag.

The poor Fed has to steer a mammoth tanker (the economy) between two cliffs, while looking at a monitor that delays its vision. 

Could this be good news for Bitcoin?

Already Bitcoin is doing well, maybe in response to the lost trust in the banking sector. Savers are reminded that BTC is a haven. But what if the interest rates will come down in the coming year, as is expected by many analysts? This might resolve the banking crisis. But this too might be good for Bitcoin. Why? Because risk assets such as stocks and crypto tend to perform well in a regime of lower interest rates.

It seems that, in the current financial climate, Bitcoin strikes a balance between being a safe haven and a risk asset at the same time!

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