Yesterday, Fed Chairman Jerome Powell’s words upset the markets and eventually also sent Bitcoin’s value down.
Summary
The words of Fed chief Jerome Powell affect Bitcoin
Two of the most critical points of his speech were.
The first concerned future interest rate increases in the US. In fact, until yesterday it was believed that the Fed would only raise them more than two or three times, by only 25 basis points.
Instead, Jerome Powell yesterday warned that the Fed may be forced to accelerate the maneuver of raising interest rates. So no longer just 25 basis point hikes, but probably 50.
Indeed, all of a sudden analysts’ and investors’ forecasts have adjusted, so much so that now a 25-point rate hike on 22 March is given as only 26.5% likely, while a 50-point hike is now given as 73.5% likely.
The fact is that the January euphoria in the financial markets was probably due precisely to the hope that the Fed might reduce the rate hike, or even stop. Since the exact opposite emerged yesterday, the markets reacted badly.
The second critical point, the one actually with the greatest implications, concerns the cost of money in the United States. In fact, according to Powell’s explicit statements, it may come in at a higher level than expected so far.
Previously it was believed that if interest rates were raised, they could reach a maximum of 525/550 points during 2023.
Instead, after Powell’s words yesterday they are assigned a higher probability of reaching 550/575 points in June, with as much as a 34% probability that they could reach 575/600 points in September. However, it is worth mentioning that right now the chance of them remaining at 550/575 points in September is even greater (42%).
Even interest rates at 500 points, such as those that will presumably occur after 22 March, are believed to be high, so 550 or 575 points would definitely be very high.
Not to mention 600 points, which is a rate that has not been reached since the early 2000s, when we had to react to the financial crisis due to the bursting of the dot-com bubble, and the aftermath of the attack on the Twin Towers.
The economic and financial scenario
Powell also said that recent economic data have turned out to be more robust than anticipated in recent months, and that decisions about raising rates have not actually been made yet, because they will depend on additional data that emerge in the coming weeks.
The most important data are two.
The first is definitely inflation. In a few days the official inflation figure for February in the US will be announced, and if this is not particularly good it is to be expected that the Fed will be forced to go ahead with the plan described by Powell.
Indeed, it should be remembered that in January not only was inflation at 6.4% still far from the 2% target, but it was also very little down from 6.5% in December.
Only in the event that it fell well below 6% in February could the Fed have the luxury of not increasing the pace of rate increases.
The second data point concerns the labor market, both because the Fed not only keeps inflation in check but also has the statutory goal of encouraging full employment, and because a particularly good state of the labor market paradoxically risks forcing the Fed to raise rates more, since it would favor inflation.
Powell also admitted that the Fed intends to keep rates high for a while, and markets do not like that very much.
The price of Bitcoin
Yesterday, when Powell began to say these things, the price of Bitcoin suddenly dropped from $22,300 to $21,900, but almost immediately rebounded bringing it back above $22,300.
However, after Powell’s speech ended, things took a turn for the worse again, so that first the price of BTC went back to $21,900, and then overnight even fell for a very brief moment even below this threshold.
It is now practically hovering around $22,000, vaguely similar to how it did on 13 February around $21,600. It is worth noting that on 14 February it bounced as high as $22,200, and the following day it suddenly jumped above $24,000.
Many yesterday pointed out that it seemed anomalous to rebound from $21,900 to $22,300 while Powell was still speaking, and indeed in the following hours the price returned to $21,900.
While the US stock exchanges gave clear and unmistakable signs of weakness yesterday, by contrast, Bitcoin gave a tentative sign not exactly of strength, but at least of resistance.
In addition, the Dollar Index yesterday sprang above 105 points, even coming close to 105.9 points during the course of the day, before falling below 105.8 points. Considering that only yesterday it had also been below 104.2 points, it is not impossible to imagine a decline from current levels that could encourage a small rebound in Bitcoin’s price.
