Since the third quarter of this year, when the Fed will reduce its asset purchases (Taper), in what order, and at what speed has withdrawn from unconventional monetary policy has aroused market attention.
Based on the FOMC meeting proposed on September 22, 2021, that it may soon be warranted, if everything develops as expected, then asset purchases (Taper) will be reduced by the end of this year. The middle of next year will be the right time to end Taper. But even if the balance sheet stops expanding, holding long-term bonds will still support a loose financial environment. What needs to be understood here is that Taper has nothing to do with raising interest rates.
The market is mostly concerned about the Fed’s Taper and interest rate hikes. The reason lies in its role as a “water” valve, which plays a decisive role in global asset prices and asset allocation.
However, most of the market is analyzing the impact of its traditional asset prices, and rarely analyzing its impact on cryptocurrencies. Therefore, this article will start from the perspective of cryptocurrency and analyze the impact of the Fed’s Taper on the crypto industry and its transmission path.
Fed Taper rhythm
From the Taper 1.0 era:
2013.5.1 FOMC meeting: It is possible to increase or decrease the purchase of treasury bonds.
2013.6.18 FOMC meeting: It is possible to increase or decrease the purchase of treasury bonds.
2013.7.31 FOMC meeting: It is possible to increase or decrease the purchase of treasury bonds.
2013.9.18 FOMC meeting: May reduce the purchase of national debt.
2013.10.30 FOMC meeting: may reduce the purchase of national debt.
2013.12.18 FOMC meeting: Announce the specific time and plan of Taper.
2014.1-2014.10 FOMC meeting: Taper.
From the Taper 2.0 era:
2021.7.28 FOMC meeting: Taper was not mentioned.
2021.8.27 Jackson Hole Conference: The purchase of Treasury bonds may be reduced by the end of the year.
2021.9.22 FOMC meeting: May reduce the purchase of treasury bonds. (May soon be warranted)
Based on 13 years of experience, after the release of the Taper signal in late May, interest rates have risen rapidly, and major global assets have generally fallen within one month . After the official Taper at the end of 2013, interest rates fell instead, and global stock markets generally rose. QE3 officially ended at the end of October 2014. In December of the following year, the Federal Reserve raised the federal funds rate by 25BP, ending the era of zero interest rates.
Since the beginning of this year, the market’s expectations for taper are being reflected in asset prices at a moderate pace. In the future, as the Fed communicates more with taper, the market may still fluctuate intermittently, but the 13-year “reduction panic” is recurring. The possibility is low. Compared with 13 years, this time the Taper Fed draws on historical experience and lessons, pays more attention to communication with the market, repeatedly emphasizes that Taper will notify in advance, and newly established SRF and SFIMA at the FOMC meeting in July 21. Purchase convenient tools.
According to the results of the New York Fed’s primary dealer survey in July 21, the market expects that the Fed may start Taper in the fourth quarter of 21. The epidemic will have a limited impact on the Taper plan. With reference to historical experience, the delay may not exceed one quarter.
After the epidemic, the major developed economies have adopted ultra-loose monetary policies, facing the dual pressures of employment recovery and rising inflation. In the second quarter, the liquidity of the U.S. dollar was extremely loose. The Fed’s overnight reverse repurchase usage surged and the TGA balance decreased, resulting in excess inter-bank liquidity. Demand for U.S. Treasury bonds surged accordingly, and short-end Treasury bond interest rates approached zero.
In August, at the Jackson Hole meeting, Powell still emphasized that “inflation is a temporary phenomenon.” The CPI fell slightly after rising for many consecutive months, and the Fed’s pressure to withdraw from easing eased slightly. Therefore, in the medium term, it is foreseeable that inflationary pressures will not fade quickly, and there is a possibility of marginal tightening of overseas monetary policies in the second half of the year.
The impact of the Fed’s Taper on cryptocurrencies
Since Binance Exchange cannot obtain the price data of the pie starting in 2013, we will start a retrospective discussion with the data in October 2017.
We compare the transaction volume with the number of transactions, and at the same time strip the active transaction volume from the transaction volume. Active trading volume represents the order of Taker. We can think that most institutional traders or large-scale traders are more likely to take the initiative to take orders when making a deal, and these traders can be regarded as smart traders in the market. They will analyze the macro market economy more and also It has a greater deterministic effect on the market. Therefore, active trading volume data can better reflect the real dynamic changes of the big pie on the macroeconomic and institutional asset allocation.
Tip: Pay attention to the part where the number of transactions has abnormal values, and you can often judge the bullish and bearish changes in the market for a period of time. The special divergence between the trading volume and the number of transactions can judge the true movements of institutions and major investors.
The transmission mechanism of structured monetary policy to the price of cryptocurrency
The impact of monetary policy on investor sentiment
As the crypto asset industry with the most concentrated emotional influence, investor sentiment is the key factor in analyzing the most concentrated asset prices. At the same time, the transmission of investor sentiment to monetary policy is also an important factor. Cryptocurrency traders are retail investors and information asymmetry is common in the stock market. Therefore, when most people make decisions, they do not make rational decisions, but are affected by cognition, psychological deviations, and emotions. Influences have made irrational behaviors, such as over-belief in their own choices when investing, or blindly following the choices of others when investing, which is the herd effect. These will ultimately have an impact on the currency price.
From the analysis of the transmission mechanism, it can be known that changes in the money supply, interest rate, and exchange rate will affect the currency price, and the transmission mechanism is complex and diverse, and the transmission path is not single. Expected to conduct transmission, which means that investor sentiment plays an irreplaceable role in it.
Tip: You can build sentiment indicators for tracking investment research. For example, friendly index, investor intelligence index, investor confidence index.
The macro economy reaches the cryptocurrency market through intermediary channels
From the perspective of interest rates, there is a significant spillover relationship between interest rates and the returns of the crypto market. Empirical evidence shows that there is an obvious non-linear relationship between the big cake index futures and LIBOR. The main intermediary channel lies in the macro asset allocation based on the minimization of asset portfolio risk . Based on the analysis of the 5-year and 10-year U.S. Treasury bond yields, it can be found that the recent increase in U.S. Treasury bonds will affect the liquidity allocation of encrypted assets, and LIBOR-based global interest rates are in a downward channel.
It is generally believed that interest rates have a significant negative impact on crypto assets. This is mainly from the perspective of asset selection theory. Interest rates affect asset selection from two aspects: one is the impact of asset substitution. When interest rates fall, people will buy more high-risk and high-yield assets, which will cause prices to rise. . The other is the accumulation effect. When interest rates fall, people’s total property returns will fall. In order to achieve the previous rate of return, high-risk and high-yield assets will be added. Therefore, it can be considered that stock prices are negatively correlated with interest rates.
In addition, the money supply is also an important factor.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/alchemy-analysis-the-impact-of-the-feds-taper-on-cryptocurrencies/
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