The Fed Wants You to Lose Money & Probably Crypto, Too

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The Federal Reserve of the United States may not be finished fighting inflation until you’ve lost money on bitcoin (BTC).

The reason for this stems from the fundamentals of central banking. The Fed implements monetary policy (currently, raising interest rates), which has an impact on the economy by influencing, among other things, the price of key assets – “financial conditions,” in central bank jargon.

For the majority of this year, Fed policymakers have been optimistic about markets like stocks, preparing traders ahead of time (known as “forward guidance”) for upcoming changes in monetary policy. But that appears to be a thing of the past. Fed Chair Jerome Powell announced in July that central bankers would no longer use forward guidance.

“It’s clear the Fed wants to see tighter financial conditions, which include lower stock prices,” Brian Overby, senior markets strategist at Ally, wrote in a note.

Given the price correlation between cryptocurrencies and equities, this most likely also applies to cryptocurrencies. Given their recent losses, crypto investors are probably not happy to hear that.

According to CoinDesk data, Bitcoin has already experienced a year-to-date decline of more than 57%. This decline is being attributed to a wider sell-off in crypto assets that is being driven by industry bankruptcy and a deteriorating global macroeconomic environment.

Price stability and maximum employment are the two responsibilities of the American central bank. Prices are currently unstable and inflation is significantly higher than the Fed’s 2% target. The unemployment rate is still low, and businesses are creating more than 300,000 new jobs each month. That’s fantastic news for job seekers but, ironically, something that might increase inflation, putting additional pressure on the Fed to act more firmly. That spells potential trouble for markets like stocks and crypto.

Even though the US GDP has fallen for two consecutive quarters, the economy appears to be strong enough to withstand further aggressive rate increases. However, additional indications of weakness will put the Fed to the test and force decision-makers to consider how much suffering they want to inflict on the markets.

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