Beyond Speculation: The FOMC's Implications for Bitcoin
Unpacking the Federal Reserve’s FOMC Outcomes and Bitcoin's Ascendancy as a Safe Haven Asset Amid Economic Uncertainty
The Federal Reserve’s Federal Open Market Committee (FOMC), the body that votes on monetary policy, met this week to decide their policy for the next six weeks. As expected, nothing changed. They held their Fed Funds target range at 5.25–5.5% and their rate of balance sheet reduction as is. Things were kept so steady that their policy statement was almost identical to January’s meeting, only removing six words from the first sentence and making no other changes.
Changes were revealed, however, in the press conference. Powell mentioned it may be appropriate to reduce the rate of balance sheet reduction as soon as the next meeting. Meaning their Quantitative Tightening (QT) policy is going to ease, so the first baby step toward cuts was announced. A new Summary of Economic Projections (SEP) also accompanied this meeting, in which members gave their estimates for the Fed Funds rate. The median of committee members’ estimates for the end of the year came in at 4.6%, the same as at the at the last meeting.
Source: Federal Reserve
The fact that the median projection is unchanged is a big deal because they only have six meetings left this year. On top of that, the market is currently not pricing in a cut at the next meeting in May. That leaves three cuts within five meetings if their cuts come in 25 bps steps. That is a significant pace if we are also to believe that the economy is doing fine.
Understanding the Neutral Rate
Much of the discussion about the Fed’s policy revolves around the idea of the “neutral rate” of interest. You might hear it called the “natural” or “equilibrium” rate as well. This is a theoretical interest rate at which monetary policy is neither accommodative nor restrictive. In this state, the economy is growing at its theoretical potential and inflation is stable, meaning the central bank's interest rate neither stimulates nor restrains economic growth.
This theoretical neutral rate guides Fed policy. Exactly two years ago, the Federal Reserve set out on the current cycle of hiking. Their goal was to reach a sufficiently restrictive policy that would tame the highest inflation in decades. The Fed Funds rate was hiked extremely rapidly and taken to an extraordinarily restrictive level in order to fight the extraordinary inflation. This was unusual because the Fed has a “dual mandate," stable prices, and maximum employment. By aggressively hiking, the Fed was sacrificing the maximum employment of half their mandate.
The Federal Reserve can only estimate the neutral rate based on the perceived results of their policies on their chosen measure of inflation, Core PCE in this case. However, the neutral rate itself is a theoretical concept, and relying on such an abstract metric to anchor their policy framework is precarious at best. It is a flimsy foundation for such critical policy decisions.
Keep reading with a 7-day free trial
Subscribe to Bitcoin Magazine Pro™ to keep reading this post and get 7 days of free access to the full post archives.