Following the “Indicator Framework of Bitcoin’s Future Trend”, the author continues to analyze from the perspective of the macro environment, combined with the current topic of interest rate hikes by the Federal Reserve that the currency circle is concerned about.
Why is the news of interest rate hike released sometimes down and sometimes up instead? Who in the end is deciding the pace of interest rate hikes? How do they feel about raising interest rates? This article will start from the impact of the two monetary policies of interest rate hike and quantitative easing on the price of Bitcoin, combined with the current monetary policy decision makers’ attitude towards interest rate hikes, hoping to bring help and inspiration to everyone in the interpretation of monetary policy .
Learn from history: rate hike = bearish?
Bitcoin is the originator of Crypto and a barometer of the market. We compare the market value of Bitcoin, the internal indicators of Crypto during the halving cycle with external indicators such as the Federal Reserve interest rate and the QE cycle, and find Bitcoin from historical data. The change law between the currency price and these four sets of data.
Fed real interest rate (orange) vs BTC price (log, blue) vs Bitcoin halving cycle (red) vs Fed QE/balance sheet reduction
Note: Green dotted line represents quantitative easing (QE), red represents balance sheet reduction (QT). The horizontal dotted line represents the monthly bond purchase/balance reduction scale, and the shaded area represents the total bond purchase/balance sheet reduction size during the period.
BTC halving time: 2012.11.28｜2016.7.9｜2020.5.12｜2024.5 (expected)
With the three halvings of Bitcoin, the price of Bitcoin has increased by 580 times, 128 times and 18 times successively in the three bull-bear cycles.
At the end of 2012, Bitcoin completed its first block reward halving. After a slight correction in April 2013, it reached a stage high of $1160 in November of that year, which lasted 12 months. With low interest rates and the Fed’s third QE (quantitative easing, 2012.9~2014.10), the price of BTC has increased by 580 times from the low point of the $2 stage. At this time, the market value of Bitcoin is small ($13.9b), and The trades are mostly happening in China, so the Fed’s monetary policy doesn’t actually have much of an impact on the Bitcoin price.
Bitcoin completed its second halving in July 2016, before BTC price completed two bottom confirmations: 2015.1 ($152)H and 2015.8 ($198). Since then, the price has risen all the way, and reached a stage high of 19600 18 months after the halving (2017.12), a 128-fold increase from the stage low. During this period, under the condition that the Fed did not conduct QE and the real interest rate rose sharply, BTC rose against the trend, and the market value reached $320.2b, a 22-fold increase from the previous high. It is worth noting that although the interest rate hike failed to suppress the growth of Bitcoin, the shrinking of the balance sheet in October 2017 had an obvious cooling effect on the bull market.
The third halving in May 2020 opened an ascending channel after completing the bottom confirmation of $3850 in March of the same year. At the same time, the Federal Reserve launched its fifth round of super QE in March in response to the impact of the new crown virus. Two months later, the Fed’s interest rate fell to a near ten-year low. Due to the restrictions of domestic policies and the gradual popularity of BTC by US capital, a major feature of this round of bull market is the “US stock marketization”, that is, the price of BTC and US stocks (especially technology stocks) show a strong correlation. The ample liquidity brought by the favorable monetary policy, coupled with the increasing acceptance of Crypto by the traditional market, this bull market reached the current price high of $69,000 in November (i.e. 19 months after the halving), a distance from The bottom of a bear market has increased by nearly 18 times, and the market value has increased by 2.94 times from the previous high.
The relationship between Bitcoin and the United States has also brought the Federal Reserve’s monetary policy to the attention of the crypto circle.
Who decides, hawks and doves?
The so-called “doves” and “hawks” originally originated from the media’s description of political and diplomatic attitudes, especially war tendencies. The hawks mainly fight and prefer to use tough means to solve problems and cut through the mess; while the doves are in harmony, sometimes boiling frogs in warm water. When these two words are used in monetary policy, the hawks are more sensitive to inflation, hoping to control inflation and stabilize prices by tightening monetary policy (such as raising interest rates and shrinking the balance sheet). Doves will pay more attention to stimulating employment, maintaining economic growth, and entering the rate hike cycle later.
The U.S. monetary policy is formulated by the Federal Reserve. The so-called Fed rate hike and rate cut is to adjust the U.S. federal funds rate, either unchanged or adjusted by at least 25 points, such as a 25-point rate hike at 2.25%-2.50%. , it becomes 2.5%-2.75%, and the adjustment decision is announced through the Federal Open Market Committee (FOMC) meeting.
Due to the voting system, the decision on whether to raise or lower interest rates is not decided by the Fed chairman alone, but by a committee of 12 members of the Fed voted together. Below, we briefly understand the composition of the Federal Reserve. The Fed has three key entities – the Board of Governors, the Reserve Banks and the Federal Open Market Committee (FOMC).
The Federal Reserve Board of Governors in Washington, D.C. is the governing body of the Federal Reserve System. Council members are nominated by the President of the United States and confirmed by the Senate. The full staff is 7, and as of now (2022.2), only 4 are in office, namely Fed Chairman Jerome H. Powell, Associate Vice Chairman Lael Brainard, Governor Michelle W. Bowman, and Governor Christopher J. Waller. The remaining three, nominated by President Biden in January, are Sarah Bloom Raskin (left), a former U.S. Treasury secretary, to oversee the board, and two economist-turned-governors Philip Jefferson (center) and Lisa Cook (right).
Well, since the 7/12 commissioner is nominated by the president, we have to refer to the historical attitude of the president and his party on interest rates. Although the local Fed is not directly appointed by the president, the president can still indirectly influence the candidate of the local Fed chairman through the nominated directors. Looking back at history, the Federal Reserve under Democratic presidents seems to be more hawkish, and it is worth watching whether Biden will reshape a more “hawkish” Fed.
The main monetary policy tool of the Federal Reserve is Open Market Operations, that is, buying and selling Treasuries and MBS. The Federal Open Market Committee (FOMC) is the decision-making body of the US monetary policy. At the FOMC meeting, 12 members vote to decide which monetary policy tool to use and how to use it. All seven members of the Board of Directors mentioned above serve on the FOMC, plus New York Fed President John C. Williams, eight of whom are permanent members of the FOMC. The remaining four members are rotated by 11 regional Federal Reserve Bank presidents. Beginning in January 2021 by the presidents of the Boston Fed, Cleveland Fed, Kansas Fed, and St. Louis Fed.
Based on local Fed presidents’ speeches in public, we summarize their preferences for monetary policy. It can be seen that the hawks dominate.
It should be noted that since the rate hike is a foregone conclusion, how much to increase and when to increase should be the focus of the next market attention.
anticipatory point of view
In the first two halvings, although the two major monetary policies of raising interest rates and quantitative easing did not play a decisive role as a whole, the halving cycle and monetary policy alternately affected prices. However, with the mainstreaming of BTC, the performance of this risky asset is gradually related to the attitude of the Federal Reserve, affecting market expectations in the short term. In the recent Bitcoin market, we can see a short-term pattern, that is, when the Fed’s hawkish remarks are in line with expectations, the price of BTC will rebound slightly; once it exceeds expectations, the price will fluctuate.
In addition to such short-term sentiments, it is also worthy of attention when the balance sheet will be reduced in this round of interest rate hike cycle. Looking back at the whole process from the Fed’s release of the signal to shrink its balance sheet in April to the start of its balance sheet reduction in October in 2017, due to sufficient expectations, the impact of the shrinking of the balance sheet on asset prices was relatively limited, but more dominated by growth factors. After the balance sheet began to shrink in October 2017, U.S. bond interest rates rose in the first three quarters of 2018, and U.S. stocks also rose. The reason why the market can continue to rise is that in addition to sufficient expectations, the fundamentals of earnings at that time also continued to rise under the impetus of Trump’s tax reform passed at the end of 2017, resisting the pressure of monetary tightening and interest rate hikes.
In contrast to this round of interest rate hike cycle, since the target rate of the federal funds is still the main monetary policy tool of the Fed, the market generally focuses on the pace of interest rate hikes, which may lead to insufficient digestion of expectations for the shrinking of the balance sheet. The minutes of the Fed’s January FOMC meeting showed that the Fed policymakers at the meeting expected to start raising interest rates soon, without mentioning the possible timing and scale of the reduction of the balance sheet. However, most participants believe that if inflation does not fall as expected, it may be appropriate to tighten the currency more quickly, and the balance sheet shrinkage may occur in May. Compared with the digestion time of 2017 and 6 months and the favorable policies, if this round of reduction of the balance sheet really starts in May as expected by the market, it may have a certain impact on the market.
Although the “hawk face” of the Federal Reserve Committee is bigger, the author speculates that in order to retain more policy flexibility, the Fed will not raise interest rates suddenly after the end of Tapper in March. Moderate interest rate hikes will wait for inflation and employment to respond. If you advance, you can increase the pace of interest rate hikes or even shrink the balance sheet. If you retreat, you can keep raising interest rates in small steps, so as to balance a better monetary policy plan between economic growth, stability and inflation control. However, once there are hawkish remarks or moves that exceed expectations, holding risky assets such as Crypto requires risk prevention and hedging.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/are-you-in-crypto-but-confused-about-the-fed-raising-interest-rates/
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