Bitcoin Bulls’ Thoughts Implications of Federal Reserve Inflation and Interest Rate News

Author: Stephen Alpher, CoinDesk; Translation: Song Xue, LianGuai

Last Thursday, Bitcoin experienced one of the most severe drops in history, at least partially due to the realization that a strong economy could mean continued interest rate hikes.

Last week, consumer spending and new home sales data for July were stronger than expected, prompting the Atlanta Fed’s GDPNow tool to raise its rapid growth forecast for Q3 (July-August-September) to 5.8%.

These numbers are typically seen after an economic recession, and the only other time the US experienced such rapid growth in the past decade was in the several quarters following the economic collapse of 2020.

Bitcoin (BTC) had been hovering in a narrow range between $29,000 and $30,000 for several weeks, but on Thursday afternoon, due to economic news, it dropped to a low of $28,000. This triggered a series of stop losses and liquidations, causing Bitcoin to quickly fall below $25,000. A mild recovery since then has brought the price back to $26,000 at the time of writing.

Higher interest rates, longer duration?

This week, the Federal Reserve Bank of Kansas City will hold its annual Jackson Hole Economic Symposium, as well as a keynote speech by Federal Reserve Chair Jerome Powell on Friday morning.

Prior to this talk, Nick Timiraos of The Wall Street Journal, known as the “Fed Whisperer” due to his close relationships within the Federal Reserve, wrote a column on Monday morning suggesting that officials believe the so-called neutral interest rate could be much higher than previously expected. It’s a rather quirky topic, but the gist is that the Fed’s benchmark federal funds rate target, currently at 5.25%-5.50%, could stay at higher levels for a longer period than market participants anticipate.

Considering a higher inflation target

On Monday, The Wall Street Journal also published a column by Jason Furman, the highest-ranking economic advisor to President Obama during his administration, urging the Fed to consider raising the inflation target from 2% to 3%.

Furman wrote, “A higher target helps cushion the economy against severe recessions.” “When the economy slows, rising inflation means that price increases and wage freezes may become more palatable alternatives for cost-cutting businesses compared to large-scale layoffs.”

What does this mean for Bitcoin?

Opinions may vary regarding higher neutral interest rates or faster target inflation rates, but the bond market quickly reacted to both pieces of news—the 10-year Treasury yield surged 9 basis points to a 16-year high of 4.34% on Monday morning.

Interest rate-linked tools compete for investors’ funds with risky assets such as Bitcoin, and higher interest rates mean less market interest in Bitcoin. In other words, why would you buy BTC when you can earn a risk-free return of 5% in a 6-month CD?

On the other hand, if the Federal Reserve indicates that it allows the inflation rate to exceed the current target of 2%, this would be an official acknowledgment of currency depreciation, which Bitcoin enthusiasts have been warning about.

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