As the U.S. economy shows signs of recovery from the pandemic-related recession, the Federal Reserve has announced it will begin tapering the US$120 billion a month it spends on bond purchases, hoping to address concerns of rising inflation. This has caused unease in the crypto industry as Bitcoin adoption over the past 18 months has been driven in part by investors wishing to hedge themselves against this inflation.
Fast facts
- In a statement released on Wednesday, the Fed said it will begin to reduce asset purchases by US$15 billion a month, starting this month until the program ends mid-2022. Under this new direction, Treasury purchases will also reduce from US$80 billion to US$70 billion per month, and purchases of government-backed mortgage securities will drop from US$40 billion to US$35 billion per month.
- The program of increased spending was created last year to help protect the economy from the worst effects of the Covid-19 recession, but as the economy begins to recover, one industry watcher says now is the time to begin winding back those measures.
- “[This decision] is purely to reflect that in their opinion, the U.S. economy has recovered enough for them to no longer need to put that support in place,” Andrew Sullivan, founder and writer for Asianmarketsense.com, told Forkast.News, adding: “That very much is seen in the strength of the results we’ve been seeing from companies in a lot of the data that’s been coming through. And consequently, I think if they hadn’t done that, then frankly, they would have worried the market that things weren’t as good as they appeared to be. So, it’s a sensible decision.”
- Known as “quantitative easing,” this form of stimulus is a way for newly created money to be injected into the economy. Unfortunately, inflation has also risen alongside this increased spending; consumer prices were 4.4% higher in September this year than they were at the same point in 2020, and inflation is now at its highest point in 30 years in the U.S. The winding down of this program is an attempt to address this issue. However, the Fed recognizes that supply chain bottlenecks and the progression of the virus itself are expected to hamper these efforts in the short term.
- According to Wednesday’s announcement, no changes will be made to interest rates until the economy reaches maximum employment, but Sullivan expects that to change soon and says that cryptocurrencies will be impacted when it does.
- “It does take us one step further towards there being a move on interest rates, and that will be the trigger on cryptocurrencies, especially on Bitcoin, which is very much used as the modern-day gold for investors,” Sullivan said. “It’s uncorrelated, it’s cheaper than gold and it’s seen as a reasonable store of value in the short term. I think people very much view it as a short-term trading way of hedging yourself. But it’s been very effective for that because it’s tradable 24 hours a day and it’s easy to store.”
- Bitcoin’s price dropped shortly after the announcement, but quickly regained its position and was trading at US$62,448 at press time, according to data from CoinMarketCap.
