Federal Reserve Lags Behind Inflation Curve – Bitcoin Magazine
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November FOMC meeting
All eyes across global markets are on the November FOMC meeting. At this point in the global liquidity cycle, seemingly all asset classes are part of the same implicit trade. The tough talk from the Fed, the central bank of the dollar-debt world, has held up so far in 2022 as it embarks on the fastest tightening cycle in modern history.
The consensus for the size of the interest rate increase is 75 bps, which will raise the key interest rate to 4.00%.
The consensus for the size of the interest rate increase is 75 bps, which will raise the key interest rate to 4.00%.
Much of this hike has already priced into the front end of the US Treasury curve, leading to all sorts of inversions across different maturities.
In terms of the yield curve, over any duration that matters, an inversion has occurred – a phenomenon that usually occurs before an economic downturn, as short-term returns rise disincentivize investment of capital over long durations due to “attractive” short-term returns . Lend your money to the US government for 30 years and lock in 4.13% or for three months at 4.13% and then reassess? The duration risk is real, and the pace of this tightening cycle against the backdrop of record high inflation conditions around the world has left investors jittery about the long-term outlook for government bonds. Not joking.
US Treasury yield curve inversion with short-term yields higher than long-term yields.
Arguably, the Fed is still behind the curve, and according to their mandate, inflationary pressures should not get this out of control while they continue to fan the flames with zero interest rate policy and $120 billion per month of quantitative easing in bond purchases. Because of the failure and subsequent hit to their credibility, the Fed is trying to cause pain in the labor market and in asset prices until inflationary concerns subside.
It’s a bold strategy, and it’s one that is absolutely destined to fail. But they’ll probably end up crashing everything while trying. However, the nominal economy – i.e. expectations for the gross domestic product (not adjusted for inflation) and the labor market – is still warm. The market seems to believe that Fed policy is in a completely new regime going forward.
Below is the bitcoin price with its average on-chain cost basis (realized price). Bitcoin is in a classic bear market consolidation phase, that many may not have more pain ahead. These periods, where panicked/leveraged investors transfer their holdings to the cautious and well-capitalized, are what create the conditions for the next bull run.
Bitcoin’s realized price shows the bear market consolidation phase.
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