Yesterday Jerome Powell emerged from the Federal Reserve’s annual Jackson Hole, Wyoming, symposium to outline the Fed’s vision for economic policy in the coming months and years. He announced that the Fed has transitioned it’s policy to an “average” target for inflation to move above 2% to offset stretches of weaker inflation.
Increasing inflation to meet 2% target
“Many find it counterintuitive that the Fed would want to push up inflation,” Powell admitted. “We will seek to achieve inflation that averages 2% over time. Therefore, following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time,” he said yesterday.
The Fed has always had a dual mandate of maintaining maximum employment rate and a fixed 2% long-term inflation rate. Relaxing the 2% inflation rate target into a more flexible approach is another unprecedented move from the Central Bank after its usage of the balance sheet to buy corporate bonds. It shows a clear preference to inflation vs deflation. It is also a clear sign to the market that money printing will continue in the foreseeable future, with less brakes on it.
Treading on a slippery slope
Obviously the policymakers’ hope is to encourage employment recovery through monetary policy, but the money the Fed has been pumping into the system, using its balance sheet since lock-down, has not really made into the hands of the general public and into the real economy. Today, MGM Resorts furloughed 18,000 staff members, or 25% of it’s workforce, suggesting that the hospitality industry for one is still far from a recovery.
With Fed’s commitment to using inflation to revive the economy, traditional financial asset bubbles that have been in formation will continue to grow. The question is, when will the musicals chairs stop? If employment data shows further signs of weakness, we may find out who is swimming naked. That’s why we’re starting to see more institutional investors look for alternatives to take chips off the table and the interest in bitcoin continues to grow.
The value of bitcoin
In the current environment, bitcoin’s value proposition is strong and more relevant than ever. As central banks continue to print money and try to address solvency issues with liquidity tools, I do think that investors (individual or institutional) should consider including bitcoin in their portfolio. As a scarce asset, bitcoin is frequently compared to gold. This similarity provides a baseline for its potential future market cap, especially as more people enter crypto and embrace the opportunity that bitcoin provides.
We saw this with MicroStrategy earlier this month when they invested their cash reserves into bitcoin as a hedge against fiat currency inflation, as well as a stronger value-gaining asset to hold. Fidelity is also creating a new fund fully dedicated to bitcoin. These monumental signals are acting as a green light for others to follow suit, starting with individual investment choices, and now spreading to institutional wealth management and corporate treasury management.
Will stablecoin liquidity move to bitcoin?
Changes in inflation over the next few years could also have an impact on the stablecoin market (what is a stablecoin?). If inflation does exceed 2% and remain above that level for a long time, liquidity in fiat-backed stablecoins could move into bitcoin markets or diversify into crypto-asset-backed stablecoins which could have more upside in terms of value gain against the dollar.