Nothing changed in the message the Federal Reserve delivered after concluding its two-day policy meeting on Wednesday. Jerome Powell, the US central bank’s chairman, decided to maintain their benchmark interest rates near zero and pledged to offer more monetary support if necessary.
As he delivered his monthly press brief, the US dollar index was falling to its two-year low, while Treasurys yield was near the bottom of their range – with the benchmark 10-year note below 0.6 percent. Meanwhile, gold was surging towards its all-time high at $2,000.
Away from the traditional assets/indexes, Bitcoin was also celebrating Mr. Powell’s dovish touch on the economy. The cryptocurrency preconceived the policy outcome and surged above $11,000 – a level it has not touched in the last eleven months.
This week’s market moves clarified two things. First, the Fed will keep supporting the US economy as long as it suffers under the influence of the rising coronavirus pandemic. Second, the constant supply of the US dollar would hold investors under the fears of inflation.
That is already visible in the recent collapse in real yields – reflecting higher inflation expectations as Treasury yields take a dip. They fell into the negative area last week.
From here, it is not hard to guess what happens further in the third quarter. The dollar will keep losing its appeal as Fed’s supply rate goes haywire. Meanwhile, lower interest rates would keep Treasurys unattractive for their peanut-like yields.
As a result, investors would want to stay away from cash-based investment vehicles. Instead, they would do what they did following March’s infamous global market crash: get into riskier assets.
In the next months, one can expect gold, silver, palladium, Wall Street indices, and even Bitcoin to grow higher. It is because of a lack of attractive returns in safer markets such as Treasurys.
Forward Guidance
Mr. Powell also said in his statement that the Federal Open Market Committee’s review of its monetary framework is pending. They will release the minutes of the July meeting in three weeks. It will show how the Fed is planning future tightening of policy concerning inflation or unemployment target.
Marvin Loh, a senior macro strategist at State Street Global Markets, noted that the forward guidance should help the Fed keep targeted interest rates in check.
The last time it happened was in 2011-13. As the 10-year Tips slipped below zero, the Fed’s explicit forward guidance helped it recover back into the positive area “before the taper tantrum shook things up.”
That is, again, bullish for riskier assets. Forward guidance that limits yields on Treasurys will trigger the so-called “TINA effect.” It stands for There-Is-No-Alternative, which signals investors’ focus towards buying equities, commodities, and other assets to seek better returns.
Bitcoin’s record so far in 2020 has been higher than its traditional peers. The cryptocurrency surged by more than 180 percent from its mid-March lows. In contrast, its safe-haven rival gold rose 31.79 percent.
Therefore, it is likely that Bitcoin rises exponentially higher with even a smaller upside move in the traditional markets.
Decelerating Stimulus and Bitcoin
But even with a wild price rally, there lies a risk of an equally volatile correction.
One has to get used to the fact that Mr. Powell would one day tighten the stimulus program. He said that the FOMC is hoping for the best, which concerns a decline in coronavirus cases or a vaccine itself.
Paris-based asset management firm Amundi noted the same in its latest note. It said the financial markets will “price in the idea that there will be no further acceleration in monetary accommodation when the economy looks to be on the road to recovery.”
That means that bond yields will recover to the upside. As a result, all the markets that boomed on easing policies will correct lower.
That will put Bitcoin in a tough spot. However, the cryptocurrency has survived bear markets before. It may help it sustain the upward sentiment on a long-term basis.
Until then, Jerome Powell’s dovish speeches every month should help Bitcoin thrive. Many, including strategists at Bloomberg, believe that the cryptocurrency will rise to its all-time high – at $20,000 – by the end of this year.
Cover Image via HedgeEye
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