Bitcoin struggles at $ 40,000 after Jerome Powell’s most confusing press conference

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Bitcoin (BTC) topped $ 40,000 on Thursday, a day after the Federal Reserve hinted it was getting closer to the unwinding of its asset purchase program that has boosted the economic recovery in the United States.

The benchmark cryptocurrency approached $ 41,000 in the previous session, ahead of the Fed’s critical update. Nonetheless, it began to lose its bullish momentum after the Federal Open Market Committee (FOMC) released its policy statement, followed by a press conference chaired by Fed Chairman Jerome Powell.

As economists had predicted, Fed officials left their monetary policy unchanged at the end of their two-day policy meeting. They noted that the US economy had made progress towards its maximum employment and inflation targets and that the Fed would continue to assess its stimulus policy over the coming months.

Bitcoin investors are closely watching the time frame within which the central bank could unwind its $ 120 billion monthly bond purchase program. This is in part because of the benchmark cryptocurrency’s $ 4,000- $ 65,000 bull run against the Fed’s lax monetary policies.

To inflation or not to inflation?

Powell had said earlier that their asset purchases would continue until they see “further substantial progress” in the US economic recovery.

But Wednesday’s presser was the first time the Fed was due to explain how it views “further substantial progress.” Steve Liesman of CNBC posed the said question to Powell, to whom he replied that it meant high numbers of workers and progress towards maximum employment.

Reporters’ follow-up questions forced Powell to explain “transient,” a term he and his office have used repeatedly in their previous FOMC statements to put aside concerns about rising inflation in the United States. . Powell took at least two minutes to respond to the sudden line of inquiry, noting that inflation will rise in the near term, but not increase year over year.

“The [consumer price] increases will occur. We’re not saying they’re going to reverse. So there will be inflation but [its] the process will stop […] If this does not affect longer term inflation expectations, it is very likely that it will not impact the inflation process in the future. What I mean by transient is that it doesn’t leave a permanent mark on the inflation process. “

Scott Skyrm, executive vice president of fixed income and reverse repurchase agreements at Curvature Securities, noted that the FOMC statement mentioned the term “inflation” or “price stability” ten times. This showed that the increase in consumer prices is in the back of their minds, even though they refute its presence by resorting to the word “transitory”.

Lyn Alden, the founder of Lyn Alden Investment Strategy, said Powell tries to admit that inflation is not transient in absolute terms, that is, the Fed chairman has accepted that their policies ongoing would lead to “significant and permanent price increases”. She added:

” To his eyes, [inflation is being] transient in [the] rate of change (year-over-year increases will not stay at this rate). “

Alden’s statements are based on one of his recent newsletters. In it, she noted that while year-to-year inflation fluctuated between highs and lows, thus appearing to be transient (the first chart below). Yet, since consumer prices have remained at a durably higher plateau after each inflationary spike, inflation has continued to rise (as shown in the second chart below).

Inflationary peaks in the United States over the years. Source: Bureau of Labor Statistics

Skyrm noted that Powell’s style of seeing “substantial further progress” only as maximum jobs while sidelining inflation fears altogether means reducing them would help improve labor data and no to pushing up consumer prices.

Therefore, if the Delta variants of Covid-19 lead to another round of lockdowns, followed by more stimulus and unemployment benefits, the labor market may not normalize. This would mean more inflation in the times to come.

The takeaways here are not about inflation. This is how government regulation can distort the transmission of monetary policy. https://t.co/4gy3PhnEKS

Scott Skyrm (@ScottSkyrm) July 27, 2021

“I suspect many may agree that this is one of the most confusing Fed press conferences,” said Mohamed El-Arian, chief economic adviser at Allianz.

“Where there may be disagreements, this is in particular why the balance between genuine economic uncertainties and what behavior scientists call active inertia / too deeply held beliefs.”

Bitcoin Price Fights $ 40,000 Resistance

Bitcoin has slipped back below $ 40,000 at the time of publication.

Bitcoin remains limited between $ 30,000 and $ 40,000. Source: TradingView.com

Technically, the cryptocurrency was at risk of correcting to the downside due to its overbought Relative Strength Index (RSI) on a daily time frame and an RSI above 70 usually limits upward bids for an asset.

Related: Weekly Bitcoin Price Outlook: BTC Bulls Expect Breakout Above 50 Day EMA

Nonetheless, Gustavo De La Torre, director of business development for the cryptocurrency exchange N.exchange, has seen an increase in demand for Bitcoin in the future, with the Fed ignoring inflationary concerns.

Calling Powell’s statements a “necessary vocal stopgap,” the analyst noted that investors would now likely secure their holdings in alternative assets as a precaution against steadily rising prices.

“Bitcoin is one of the few top candidates for this bet by investors,” he told Cointelegraph via Telegram, adding that the ability of the digital asset to attract retail and institutional investors, even amid its intermediate bearish phases, says a lot about its potential to hit a new high. high. De La Torre added:

“A return to its all-time high of $ 64,000 before year-end is imminent if inflation fears prompt investors to accumulate the asset.”

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