Top 3 Takeaways From the Fed’s Comments on Crypto

Investors were glued to their screen last week as the US Federal Reserve Chair Jerome Powell delivered an important update to their policy. This policy had major implications for all asset classes, from real estate to stocks. However, there were also implications for the digital assets sector which has thus far been overlooked by media covering the update. 

If you’re an investor in digital assets, here are the top three takeaways from this pivotal Fed update. 

Fed’s new strategy 

After a two-day meeting on Dec. 14 and 15, the Federal Open Market Committee (FOMC) decided to pull back stimulus measures and talk about raising interest rates for the first time. 

This was a sudden shift in strategy. Just a few months ago the Fed was forecasting lower interest rates throughout 2022 and a very accommodative monetary policy for the foreseeable future. This shift was triggered by the higher-than-expected rate of inflation we’re now witnessing. 

Higher inflation for longer

Jerome Powell admitted that the inflation rate was higher than the Fed had expected. To fight this wave of inflationary pressure, the Fed may have to do too many things – raise interest rates and cut back on “money printing.” 

Both of these measures are not set to be implemented by early-2022. By the end of 2022, the benchmark rate of interest should have risen three times while the asset buying (money printing) program should be completely suspended. 

Risk assets, such as stocks, are worth less if interest rates rise. Some consider cryptocurrencies risk assets too. Given the correlation between high-growth tech stocks and digital asset prices, this concern is somewhat justified. Whether or not interest rate hikes will plunge the crypto market into a deeper plunge remains to be seen. 

Jerome Powell’s views on digital assets

Fed Chair Jerome Powell also answered some direct questions about cryptocurrencies. “I don’t see [cryptocurrencies] as a financial-stability concern at the moment,” he told reporters at the meeting when asked if digital assets were on the Fed’s radar. 

He went on to say that digital assets were considered deeply speculative and risky by the Fed. While he believes the nascent sector is in need of regulations, he does not believe that regulating digital assets or cryptocurrencies is part of the Fed’s mandate right now. 

However, Powell singled out stablecoins. “Stablecoins can certainly be a useful, efficient consumer serving part of the financial system if they’re properly regulated,” he said. Given the exposure to fiat currencies, The Biden administration has called on Congress to pass new legislation that would restrict the issuance of stablecoins to regulated banks and financial institutions. 

Such restrictions would shake up the industry. Most investors rely on stablecoins to hold reserves or execute short-term trades. The most popular stablecoin at the moment – Tether (USDt) – isn’t  based in the US or issued by a regulated bank. If new regulations restrict the use of Tether, the impact on the cryptocurrency sector is far from certain. 

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