First Mover: Fed Sees No Inflation Through 2021, but Bitcoiners Are Betting on It Anyway

There’s no end in sight to loose monetary policy at the Federal Reserve, and that’s just fine with bitcoin bulls.  

Officials with the U.S. central bank, led by Fed Chair Jerome Powell, said Wednesday the economy is encountering such a drastic toll from the coronavirus that joblessness is expected to remain elevated for at least three years. 

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That means Fed officials expect to keep interest rates close to zero through 2022, while pumping at least $120 billion a month of freshly created money into the financial system for the foreseeable future. 

The officials said they see little chance of runaway inflation in the near future because the economic downturn has harshly crimped consumer demand and high unemployment is eliminating any upward pressure on wages.

Prices for bitcoin, seen by many investors as a hedge against inflation, rose on the news, as cryptocurrency analysts said the longer the central bank sticks to its loose-money stance, the higher the chances of inflation down the road. 

“We can be quite assured that the printing presses aren’t getting any rest tonight, nor any night for quite a while to come,” Mati Greenspan, founder of the foreign-exchange and cryptocurrency research firm Quantum Economics, told subscribers in an email.

Just this year, the Federal Reserve has already expanded its balance sheet by about $3 trillion to a total of $7.2 trillion. 

And Kevin Kelly, co-founder at the analysis firm Delphi Digital, told First Mover in a Telegram message the dismal economic outlook means governments may have to pump in more fiscal stimulus to jumpstart growth. The U.S. Congressional Budget Office forecasts the federal government’s budget deficit will hit $3.7 trillion this year, more than double the previous record shortfall of $1.4 trillion in 2009. 

“Such a backdrop is clearly conducive for hedges against currency debasement,” Kelly said.  

Scott Bambacigno, a vice president at crypto exchange software provider AlphaPoint, told CoinDesk’s Daniel Cawrey that “the Fed can print money but they cannot print jobs.”

“Assets like gold and bitcoin should do well if the economy continues in this direction,” he said. 

Bitcoin prices have surged 36% this year, partly on expectations the largest cryptocurrency by market value might serve as a hedge against inflation. Economists including Steve Hanke of Johns Hopkins University have written that hyperinflation episodes in Zimbabwe, revolutionary France, and elsewhere, have historically occurred when “when the supply of money had no natural constraints.” 

So far, inflation has remained muted. Rising unemployment damps wage growth and consumer demand, reducing upward pressure on prices for goods and services.

“We’re not even thinking about thinking about raising rates,” Powell said Wednesday, in a televised conference.

A summary of economic projections released Wednesday by the Fed show that top officials at the central bank expect U.S. inflation to stay below the 2% target for the next three years. 

Prices for personal consumption expenditures are expected to climb just 1% this year, down from a December projection of 1.9%, according to the document. Inflation will average 1.5% next year and 1.7% in 2022, the officials projected. 

As reported earlier this week in First Mover, bond traders also see little threat of inflation anytime soon. And data released Wednesday reinforced the reality that, for the moment, inflation is nowhere to be found. 

The U.S. Labor Department said Wednesday that another closely followed inflation gauge, the consumer price index, or CPI, climbed just 0.1% over the past 12 months, partly due to this year’s collapse in oil and other energy-related costs.

Excluding food and energy items, the so-called core CPI climbed 1.2% over the past year, less than half the rate of just a few months ago. It was the weakest core inflation readings since 2011, according to Scott Anderson, chief economist at the French bank BNP Paribas’ Bank of the West unit.

“Our forecast is for core consumer price inflation to continue to moderate year-on-year into early 2021 before turning the corner on reviving growth,” he said in an email Wednesday.

But David Hendler, principal with the bank-analysis firm Viola Risk Advisors, says it’s just a matter of time. 

“There’s huge inflation ahead,” Hendler said in a phone interview. “It’s only offset because there’s so many people not working. As people go back to work, there will be all this money sloshing around.” 

Greg Cipolaro, co-founder of the analysis firm Digital Asset Research, says bitcoin’s allure as a potential hedge against inflation dovetails with increasing interest in cryptocurrencies among institutional investors.

The money-management giant Fidelity Investments said Tuesday that, in a survey of almost 800 financial advisors, pension funds, family wealth-management offices and other institutional investors, a majority responded that digital assets “have a place in their investment portfolio.”

And on Wednesday, the bitcoin-futures exchange Bakkt and cryptocurrency trading firm Galaxy Digital said they were collaborating to provide a trading and custody solution for big investors.   

If inflation is coming, now might be the time to hedge against it. 

“Predicting the timing of inflation is very difficult,” Cipolaro said in a phone interview. “That’s still a wild card.” 

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Bitcoin watch

BTC: Price: $9,805 (BPI) | 24-Hr High: $9,980 | 24-Hr Low: $9,724

Trend: Bitcoin is flashing red, having failed to overcome key resistance at $10,000 on Wednesday, despite the U.S. Federal Reserve pledge to keep interest rates at record lows through 2022.

Right now, the top cryptocurrency by market value is trading just under $9,800, representing a 1% decline on the day. 

Prices rose 1.2% on Wednesday but, again, failed to close above the $10,000 mark.

Over the last five months, the cryptocurrency has faced multiple rejections in the $10,000 to $10,500 range. Analysts are citing the February high of $10,500 as the level bulls need to beat. 

Once that level has been crossed, the focus could shift to resistances lined up at $10,950 (the September 2019 high) and $12,325 (the August 2019 high). 

Indeed, the relentless slide in the number of bitcoins held on exchanges indicates investors remain confident about the prospects of a continued movement upward. 

The macro environment also supports bullish price action. The combination of increased monetary and fiscal stimulus is widely expected to boost inflation and hedging demand for bitcoin.

Just last month, high-profile trader Paul Tudor Jones II said he held 1%-2% of his assets in bitcoin, citing it as a new hedge against inflation.

However, resistance at $10,000 has remained intact for far too long – quick progress will be needed else traders might start to sell.

If that happens, the market could test dip demand with a notable drop to $9,000. If that’s breached, the higher low – the next support level – at $8,630, which was only created on May 27, will likely be tested again.