Federal Reserve to Tighten Monetary Policy: How Will It Affect Bitcoin Prices?

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Federal Reserve Announces Beginning of Rollback in Bond Purchases

It’s been a wild run for Bitcoin (BTC) this year. As of early November, the leading digital currency has been hovering around $62,000, due in part to a solid group of major-league investors buying it up in the belief it could be a hedge against inflation.

That may soon change. In its statement on November 3, the Fed formally announced it will begin a rollback of its $120 billion a month crisis-era quantitative easing program established to bolster the U.S. economy during the pandemic. The purchase of U.S. Treasurys will be reduced by $10 billion a month and government-backed mortgage securities by $5 billion monthly.

The wind-down is expected to continue into mid-2022. In addition, the Federal Open Market Committee (FOMC), which establishes U.S. monetary policy, said in the statement that it is also prepared to adjust the pace of net asset purchases as the economic outlook may warrant.

Additionally, while the FOMC acknowledged in its statement that inflation was on the rise, it said the factors behind price increases were “expected to be transitory.”

What This Could Mean for the Price of Bitcoin

The announcement did not come as a surprise as Fed Chairman Jerome Powell suggested in a September meeting that a rollback was imminent. While the price of BTC dipped briefly following the November announcement, it quickly leveled off.

So far, the Federal Reserve has not touched interest rates, which remain at nearly 0 percent. But analysts suggest a hike may soon be in order from the Fed in an effort to stave off inflation. If that occurs, BTC may begin to lose its luster.

Two Forecasts for Bitcoin

Some analysts predict that Bitcoin’s price will dip incrementally with the rollback. The argument is a historical one. BTC prices have often followed the price of stocks, which tend to fall when monetary policy is tightened.

However, Joe DiPasquale, CEO of crypto hedge fund BitBill Capital sees it differently. His firm expects the price to get to $80,000 by year’s end. DiPasquale argues that the quantitative easing program, the largest in U.S. history, could lead to unprecedented inflation no matter what the Fed does. This would generate increased demand for the digital currency and push the price ever higher.

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