Crypto takeoff in sight if Fed raises inflation target. Inflation, which triggered monetary policy tightening by central banks, is the main factor behind the fall of Bitcoin and cryptocurrencies in general in recent months. However, the subject will be more than ever on the front of the stage this week with the publication of the American CPI for the month of September, on Thursday.
The economic fallout from the 2020 coronavirus pandemic as well as the impact of the Russian invasion of Ukraine has indeed caused a very sharp rise in inflation this year.
Inflation has therefore greatly exceeded the target of the main central banks, which is generally around 2%. As a result, central banks, and especially the Fed, have acted vigorously by raising interest rates sharply in recent months.
Indeed, raising interest rates is the Fed's main tool for controlling inflation. The idea is that higher borrowing costs will slow down consumption and investment and therefore the economy, with a dampening impact on inflation.
What impact on cryptos if the inflation target is raised?
However, despite a massive rate hike at recent Fed meetings, US inflation is still not declining. This has prompted several economists to consider that the Fed and other central banks could change their official inflation targets, something not seen for several decades.
However, this would have several profound consequences on the economy, including a potentially bullish impact on the cryptocurrency market. In particular, raising the Fed's inflation target would reduce the need to raise rates too high, shortening the path that remains to be traveled to reach the target.
In other words, it would lower the Fed Funds end rate forecast. In the end, this should therefore be considered a form of monetary easing.
Moreover, it would severely damage the already reduced confidence of investors in the Federal Reserve. Indeed, raising the inflation target could be interpreted as an admission of failure, or worse, a decision taken in panic, after several rate hikes that did not bear fruit.
Most importantly, accepting a new normal including 4% inflation would accelerate the gradual loss of value of money, so let's highlight the disinflationary nature of cryptocurrencies.
The fate of cryptocurrencies will depend on the US CPI this week.
Speaking of inflation, it should be noted that the US consumer price index will be the most important economic indicator of the week for cryptocurrencies as for all global markets.
Expected Thursday at 2:30 p.m., the US CPI could indeed significantly influence market expectations for the next Fed meeting. In fact, higher-than-expected inflation would comfort the Fed in the aggressive tightening of its monetary policy. This would further increase the likelihood that it will proceed with another 0.75% rate hike for its next meeting, or even accelerate to 1%.
On Bitcoin as on most other cryptocurrencies, this would undoubtedly have a very strong downward impact.
Conversely, a good inflation surprise on Thursday would ease the pressure on the Fed to raise rates. We could thus observe a decline in expectations of a 0.75% rate hike for the FOMC meeting in early November.
This outcome would therefore have a bullish impact on cryptocurrencies and risky assets in general.
Inflation causes national currencies to lose value over time: Protect yourself by building a portfolio of ideal cryptocurrencies for long-term investing!
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