The bitcoin price has dropped to lows not seen since the pandemic crypto rally began in late 2020 after a perfect storm of Federal Reserve interest rate hikes, the scaling back of its huge $9 trillion balance sheet and a huge $18 billion stablecoin meltdown (with the collapsed cryptocurrency luna staging a shock rebound this weekend).
Now, one widely-respected analyst has warned the Federal Reserve, “endorsed” by U.S. president Joe Biden, will pursue a program of “shock therapy” in order to drive down demand and “slay” inflation—with the crypto crash merely “an unexpected bonus.”
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“Volatility is like napalm for risk assets,” Zoltan Pozsar, the global head of Credit Suisse’s short-term interest rate strategy, wrote in a note that was widely shared on social media this week.
“Consider at least the possibility that the extreme volatility and lack of liquidity you see in markets is by design, and the Fed will not be deterred by it, but rather that it will be emboldened by it in its singular pursuit of price stability. If an asset price correction is a desired outcome of hikes, and a big slowdown in growth is necessary to slay inflation, the more the curve inverts on the Fed, the harder it will push back against it.”
Data this week showed U.S. consumer prices rose at an annual pace of 8.3% in April, outpacing expectations and remaining stubbornly at a four-decade high.
Earlier this month, the Fed hiked interest rates by half a percentage point—the largest rate increase in 22 years. Since then, Fed chair Jerome Powell, who was this week confirmed for a second four-year term, has signaled more similar-sized rate hikes are on the way while the Fed will also begin winding down its $9 trillion balance sheet that’s ballooned through the pandemic era.
“I agree with what Powell said last week, that the number one threat [to] the strength that we build is inflation,” president Biden said this week in comments interpreted by Pozsar to mean Biden “announced the end of the Fed put, and endorsed the Fed call to slay inflation.”
“The message is quite clear,” Pozsar wrote. “Quantitative easing overstayed its welcome; we need a round of negative wealth effects; we need ‘shock therapy.’ The Fed, on a singular mission to slay inflation, won’t rest in its pursuit of tighter financial conditions until yields shift higher, stocks fall more, and housing turns as well. The crypto sell-off is just an unexpected bonus.”
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As well as a brutal crypto crash that’s wiped out bitcoin’s and ethereum’s gains over the last year, the S&P 500 is currently down more than 16% since the beginning of 2022 and the tech-heavy Nasdaq 100 is down 25%. The Dow’s lost 12% since January.
“The Fed is now in the business of writing a call option on risk assets—not just stocks, but housing and crypto as well,” wrote Pozsar.
For some, the crypto crash has eclipsed the stock market sell-off, with volatility expected for the “foreseeable future.”
“The real story … has to be the crypto rout,” Danni Hewson, an analyst at London-based brokerage AJ Bell, wrote in emailed comments.
“There’s plenty of talk about increasing regulation of the space, but for those who’ve lost what they couldn’t afford to lose it comes too late. Market volatility is expected to remain for the foreseeable future and it’s hard not to make knee jerk moves but history teaches that up follows down and sometimes the right move is not to move.”