Bitcoin (BTC) rose above $40,000 on July 29, a day after the Federal Reserve hinted that it was getting nearer to unwinding its asset purchasing program that has boosted the economic recovery of the United States.
The benchmark cryptocurrency previously approached $41,000 ahead of the critical Fed update. Nonetheless, it started losing upside momentum after the Federal Open Market Committee (FOMC) released its policy statement, followed by a press conference helmed by the Fed's chairman, Jerome Powell.
As economists expected, Fed officials left their monetary policy unchanged at the end of their two-day policy meeting. They noted that the U.S. economy has advanced higher toward its maximum employment and inflation goals and that the Fed would continue to evaluate its stimulus policy in the coming months.
Bitcoin investors have been closely monitoring how soon the central bank might unwind its $120-billion-per-month bond-buying program. That is partly because of the benchmark cryptocurrency's bull run from $4,000 to $65,000 against the Fed's loose monetary policies.
To inflate, or not to inflate?
Powell had earlier said that the Fed's asset purchases would continue until it sees "substantial further progress" in the U.S. economic recovery.
But July 28's press conference was the first time the Fed had to explain what it sees as "substantial further progress." CNBC's Steve Liesman put the question before Powell, who responded that it means strong labor numbers and progress toward maximum employment.
Follow-up questions by reporters pressed Powell into explaining what "transitory" means, a term he and his office had repeatedly used in their previous FOMC statements to sideline concerns about rising inflation in the United States. Powell took at least two minutes to address the sudden line of inquiry, noting that inflation will rise in the short term but won't rise year-over-year.
"The [consumer price] increases will happen. We're not saying they will reverse. So, there will be inflation, but [its] process will stop. [...] If it doesn't affect longer-term inflation expectations, then it's very likely not to impact the process of inflation going forward. What I mean by transitory is that it does not leave a permanent mark on inflation process."
Scott Skyrm, executive vice president of fixed income and repo at Curvature Securities, noted that the FOMC statement mentioned the term "inflation" or "price stability" 10 times. That shows that rising consumer prices are in the back of the Fed officials' minds, even though they refute its presence by resorting to the word "transitory."
Lyn Alden Schwartzer, founder of Lyn Alden Investment Strategy, said Powell was trying to admit that inflation is not transitory in absolute terms — i.e., the Fed chair accepted that its ongoing policies would lead to "permanent significant price increases." She added:
"In his view, [inflation is] transitory in rate of change terms (the year-over-year increases won't stay at this rate)."
Alden's statements took cues from one of her recent newsletters. In it, she noted that the year-over-year inflation wobbled between highs and lows, thereby appearing transitory (the first chart below). Still, since the consumer prices remained at a permanently higher plateau after each inflationary spike, inflation kept rising (as shown in the second chart below).
Skyrm noted that Powell's style of looking at "substantial further progress" as only maximum employment while completely sidelining inflation fears mean the Fed's tapering would respond to improved labor data not soaring consumer prices.
Therefore, if the Delta variant of COVID-19 leads to another round of lockdowns, followed by more stimulus and unemployment benefits, one may not see normalization in the jobs market. That would mean more inflation in the times ahead.
The take-away here isn’t about inflation. It’s how government regulation can distort the transmission of monetary policy. https://t.co/4gy3PhnEKS
— Scott Skyrm (@ScottSkyrm) July 27, 2021
"I suspect that many may agree that this was one of the most confusing Fed press conferences," said Mohamed El-Arian, chief economic adviser at Allianz.
"Where there may be disagreement is why — particularly, the balance between genuine economic uncertainties and what behavioral scientists call ‘active inertia’/too deeply wired convictions."
Bitcoin price battles $40,000 resistance
Bitcoin has slid below $40,000 once more at time of publishing.
The cryptocurrency risked correcting lower, owing to its overbought relative strength index (RSI) on a daily timeframe chart (an RSI reading above 70 typically limits further upside bids for an asset.)
Related: Bitcoin price weekly outlook: BTC bulls await breakout above 50-day EMA
Nevertheless, Gustavo De La Torre, business development director at the cryptocurrency exchange N.exchange, sees more demand for Bitcoin in the future as the Fed ignores inflationary worries.
Calling Powell's statements a "necessary vocal palliative," the analyst noted that investors would now likely secure their holdings in alternative assets as precautionary steps against consistent rising prices.
"Bitcoin is one of the few prominent candidates for this bet by investors," he told Cointelegraph, adding that the digital asset's ability to attract retail and institutional investors even amid its interim bearish phases speaks volumes about its potential to reach a new record high. De La Torre added:
"A surge back to its All-Time High price of $64,000 before year-end is imminent if inflation fears stir investors to stack up the asset."