Crypto winter continues and hodlers are impatient for good news. Many have pinned their hopes on ‘The Fed pivot.’ A pivot implies that the US central bank will reverse policies that have raised interest rates and decreased the money supply. This change would send crypto prices to the moon. However, Crypto Twitter’s predictions that the pivot is approaching are misguided. Despite the plethora of parroted platitudes promising, "Your bags are blasting off in Q4," the reality is that markets are going to experience a different “p” word: pain.
The most obvious reason that the Fed won’t change its policies is inflation. At an estimated 8.5%, the Fed’s core mission right now is to help the average US citizen afford necessities like food, housing and energy. This goal is important to remember; the Fed is only secondarily concerned about the global economy and the stock market. With major US elections coming up in November, the Board of Governors will make the needs of Biden’s constituency their top priority.
With that most obvious reason out of the way, let’s look at 5 macroeconomic factors that will keep interest rates soaring and moon bags grounded:
So this core reading may be telling us about the past, not the future. Given this reading, the Fed will have no choice about continuing to hike, but it shouldn't greatly move your views about how long and how far the hikes will have to go 4/— Paul Krugman (@paulkrugman) September 13, 2022
1. The CPI. Data from the Consumer Price Index shows that, despite increased prices, consumers are still demanding goods at a higher rate month over month. Demand is the fuel that fires up inflation. This is why Paul Krugman tweeted that CPI data is going to force Fed hikes.
2. US unemployment numbers are encouraging. While the unemployment rate rose by .2% last month, many analysts thought this was a good thing. The current 3.7% rate is still low, historically speaking. Moreover, the rise in joblessness was caused by an increase in the number of people looking for work. The US labor market has been hurting due to the “Great Resignation.” More workers means a more balanced supply and demand for labor.
3.The affordability crisis. As mentioned above, making life’s necessities affordable is the main goal of the Fed. Were the Fed to pivot, markets would skyrocket across all sectors of the economy. This would essentially make the rich richer. Spending and investing would increase; costs of goods and housing would therefore increase too. This is the opposite of what the Fed wants.
July data on income/spending. All numbers vs. June:— Ben Casselman (@bencasselman) August 26, 2022
Personal income: +0.2% (vs 0.7% in June)
Consumer spending: +0.1% (vs 1.0%)
Real spending: +0.2% (vs flat)
Consumer prices: -0.1% (+1.0%)
Prices ex. food/energy: +0.1% (0.6%)https://t.co/IY4MD7rDMy
4. The Fed doesn’t care (that much) about the Euro, Pound and other global currencies. Many have predicted that the dollar is too strong and the Fed will have to pivot in order to facilitate global trade. In fact, Market Watch even spread FUD that the insane demand for dollars could trigger a global banking crisis. What’s so bad about a strong currency? Theoretically, when a native currency is too strong, domestic production has trouble exporting because foreign buyers are hurt by the exchange rate. Thus, domestic producers may have to cut jobs as sales decline. However, the U.S. is largely insulated from this issue. The States are a net energy exporter and also export a lot of food and computers. These products are not easily replaced by other global sources. Therefore, a strong dollar won’t hurt the American side of global trade.
5. A pivot would hurt the Fed’s credibility. Perhaps this doesn’t count as a macroeconomic factor… but regardless, government institutions need to be credible in the eyes of national and global communities. Chairman Powell has been clear that his mission is to fight inflation despite the pain it’ll cause other parts of the economy. As long as things aren’t absolutely cratering–and the above factors show the economy has some strength–the Fed will not capriciously change course.
New data from the NY Fed shows another big drop in inflation expectations in August. pic.twitter.com/a4gPosshi1— Ben Casselman (@bencasselman) September 12, 2022
The US economy is doing well enough that the Fed won’t change course for a long time. Inflation will likely take years to reach the 2% annual target. Along the way, a decreased money supply with elevated interest rates will hurt employment numbers. At some point, the balance of stimulating the economy v. inflating prices will reverse, the pivot will be on, and the next crypto bull run will begin. What’s important for the crypto faithful is to remain engaged–lower prices can be a gift not a curse! Be prepared to invest in the coming weeks and months. Maybe the market bottom was in June, maybe it'll be soon. Either way, the opportunity to make life-changing investments is tantalizingly close.