Rarely, in these articles, do we discuss the cryptocurrency market and pricing. As we always say, the market will do its own thing.
However, with Jerome Powell making a speech at Jackson Hole, it is a good time to cover what is going on along with the impact on cryptocurrency. We might be able to garner some insight from what is taking place.
Before going any further, none of this is financial advice. Do your own due diligence and research things completely.
Powell is certainly making markets leery. His words are showing the Fed's intention. The challenge is whether they are serious or not. Sure, in public they are taking a firm approach. Things might be a lot different behind closed doors.
For this reason, we have to analyze things in a manner different from what they are parroting.
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Interest Rate Hikes
We all know the talk of the year is inflation. Powell is using the Phillip's Curve as the model for how they need to proceed. As long as unemployment is low, with prices high, that is a path for increasing rates. The challenge with this model is the 1970s. That era proved it completely false.
Nevertheless, this is what they are following so we can expect another round of rate hikes. This is going to further dampen the spirits of the markets, including cryptocurrency. The "Fed Put" no longer seems in play.
Of course, there is something else to consider in addition to the market. That is the economy. Powell seems to think we are in a strong period. Using unemployment as the main barometer, it is easy to see that conclusion. However, when looking at other metrics, we see a completely different story.
That said, Powell's view is all that matters when it comes to interest rates. Since he is intent on raising, that pushes the narrative of risk off even further. Market participants are not going to take on more risk when the Fed is talking about crashing the economy. After all, the only thing Powell can do in the inflation situation is to crush demand. The Fed has nothing to do with supply and that is where much of the problem lies.
So we can expect interest rate hikes, at least until they reverse course.
How Long Do They Continue?
The question is how long do they continue? Will we see the Fed still raising into 2023?
Here is where uncertainty enters the picture. With forecasting, it is impossible to see the future. However, what we can guess is that we are not going to see too many more hikes. Simple math explains why.
Powell is taking aggressive action in the fact of historic debt levels. It is one thing to raise rates when the global debt is $5 trillion. When we are dealing with roughly $300 trillion in global debt, the numbers get very ugly.
For example, the US Government is $30 trillion in debt. A 1% increase is $300 billion. This is near half of the entire defense budget. How long can things go with adding a few hundred billion to the cost of servicing US debt? Spread this out globally and you see how the levels become unsustainable.
How bad good it get? Unfortunately, it could make the Great Depression look like a minor pullback.
Pressure From Abroad
There is another issue at play. Powell's phone has to be blowing up from people overseas. The action of the Fed is helping to push the USD higher. This is fatal for counties with debts denominated in dollars. Their ability to payback the loans are severely hampered since they have to convert their currencies, which are weaker against the USD.
Most other central bankers along with finance ministers are well aware of this. Powell is crushing their economies. We can expect the pressure to mount as the screams start getting louder.
This will eventually get to the ears of Congress and the White House. Make no mistake, the Fed is now politicized. Powell is likely aware how catastrophic his policies are. However, he has to appease the stakeholders in this. Washington, unfortunately, is pushing a lot of the buttons.
The Impact Upon Cryptocurrency
Cryptocurrency is not a safe haven. For this reason, it is subject to the risk on/risk off sentiment. As the Fed marches forward in this direction, cryptocurrency is still going to suffer.
However, a reversal is extremely bullish. Markets are going to react the second Powell shows he is cracking. We do not even need full reversal of policy. It will be sufficient if they show signs of pausing. We might see that in the 4th quarter.
We then are confronted with the type of market action we see. Do things take off quickly or is it a slow grind higher? This is impossible to say. We will have to monitor how much people are itching to get back into the swing of things. There is a strong possibility that people are cautious for a while. The Fed, after all, could change in a heartbeat. So the markets are going to have to be convinced the Fed is for real with its reversal.
My best guess (and it is only a rough one) is that we might see these signs by November or December. There could be some waffling around during the first quarter depending upon what is taking place. If things get bad enough, we could see dovishness arise rather quickly from the Fed. If that is the case, we might even see a rate hike announced in Q1.
This would begin the process of kicking off another bull. Perhaps we can target the second quarter as to when things might be unleashed.
The best thing to do is to monitor what is taking place. The Fed's actions are completely foolish but that is what everyone listens to.
Cryptocurrency is the solution to a major problem the global economy has: a lack of collateral, i.e. money. For this reason, it has a vital role to play in the future. However, most are not aware of this and we are still looking at a market that is relatively small in market capitalization. For this reason, it is subject to the whims of sentiment.
Tying the different variables together can give us some idea of where things will be headed. At times like these, caution is the best option.
What are your thoughts? Let us know in the comment section below.
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