The Fed’s Inflation Remarks and Its Impact On The Risky Markets

Key leaders from central banks globally assemble in Jackson Hole, Wyoming, every year since 1981 to analyse the most pressing global economic issues and explore the plans and strategies to address them. This includes the top brass from the U.S. Federal Reserve. It is a big deal for global financial markets.

Fed Chair Jerome Powell estimated last year that rising inflation would be “transitory,” and it is unlikely to move beyond 2%. A year has passed since his statement, and inflation is at its highest in decades and is crouched above 8%. Powell’s tone was quite different last Friday in Wyoming regarding taming inflation. He kaput investor hopes for an open “soft landing” and prompted both crypto and stock markets to come crashing down.

Let’s see what the Fed said, its impact on crypto, and what it means for investors.

Powell stated that Fed policy actions might negatively impact households and businesses as a consequence of bringing inflation down. His comments were wrathful like never before when it came to fighting inflation; he suggested the continuation of the higher interest rate hike that will also cool down investor confidence across markets. His remarks were followed by a sharp drop in market prices, with Bitcoin plummeting to sub-$20,000 levels and Ethereum dropping 9%, with the tech-heavy NASDAQ and the S&P 500 dropping roughly 5% and 4%, respectively.

The Fed gravely impacts the crypto markets, but why? One of the primary ways the Fed maintains the economy’s price stability is by setting interest rates that determine how cheap or expensive it is to borrow money. When interest is low, like when the pandemic hits, investors move towards riskier assets like tech stocks and crypto for growth– this is how BTC rose so much from 2020 to 2021. But this “easy money” becomes a problem when it adds to inflation as demand surpasses supply– look at the surging inflation in the U.S.

Inflation has shown time and again how severely it can impact the economy and for how long; hence the Fed is taking aggressive steps to straighten it out. But rate hikes have implications as well. Investors used to just drop the riskier assets like crypto; consider the BTC prices that dropped 70% since November when investors first dreaded the Fed would hike rates. But its ripple effects can also include a “softer labour market” and recession.

Considering all of this, when Powell stated that there would be a restrictive policy stance for some time, the markets lost confidence that the fight to end inflation was almost over– hence the steep selloff on Friday.

Crypto investors are readying themselves for September, which has proven to be a rocky month for Bitcoin. The last five years saw September being the worst month for BTC, with the top cryptocurrency (by market cap) witnessing an average price drop of about 10%. BTC’s habit of being weak every late summer is now being met by the edginess in the options market as traders pay higher premiums for protection below the $18,000 mark.

Every intricacy is essential since the macroeconomic picture grows cloudier with Powell’s remarks, and the stock and crypto markets are bracing for stormier conditions moving forward.

When you look at it closely, the news looks optimistic with global crypto adoption continuing to accelerate, financial institutions expanding their digital assets offering, and the Ethereum Merge upgrading the underlying tech and economy of the second-biggest cryptocurrency– a technical feat also referred to as a “once in a lifetime moment.”