Bitcoin soared through 2020, in part due to the U.S. Federal Reserve effectively printing more than $3 trillion.
The unprecedented stimulus measures led to many big-name and institutional investors piling into bitcoin, led by billionaire hedge fund manager Paul Tudor Jones who named bitcoin as the “fastest horse” in the race to beat inflation.
Now, after taper talk from Fed officials over the last week raised eyebrows among bitcoin and equity investors, Federal Reserve Chair Jerome Powell has stamped out suggestions the central bank’s massive bond-buying campaign could be headed for a premature reduction—just as U.S. President-elect Joe Biden has unveiled a $1.9 trillion coronavirus relief proposal.
Powell, who was named as Forbes Person Of The Year In Crypto last month for his “$3 trillion bitcoin marketing campaign,” said on Thursday it’s too early to talk about making any changes to the central bank’s easy monetary policy stance.
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“We know we need to be very careful in communicating about asset purchases,” Powell said, speaking during a virtual discussion sponsored by Princeton University. “Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis, is be careful not to exit too early.”
Last month, the Federal Open Market Committee said it would continue to make $120 billion in monthly purchases of Treasuries and mortgage-backed securities until there’s “substantial further progress” toward employment and inflation goals.
The Fed plans to keep interest rates near zero until inflation has risen to its 2% target. In the 12 months through December, the U.S. consumer price index advanced 1.4% after increasing 1.2% in November, data out Thursday revealed. The annual inflation rate is below the 1.7% average over the last 10 years.
Powell said the Fed expects “a strong wave of exuberant spending” that could result in higher-than-usual prices later this year but inflation won’t reach above 2% “anytime soon.”
Meanwhile, Joe Biden, due to be sworn in as U.S. President next week, has unveiled proposals dubbed the “American Rescue Plan”—including a provision to boost the second round of stimulus checks from $600 to $2,000, expanded federal unemployment benefits and $350 billion in state and local aid.
The Democrats’ slim majorities in the House and Senate mean Biden has a good chance at getting his stimulus proposals approved— good news for equity markets but it could raise questions about the long-term viability of such high government spending.
“The large scale of the proposed support measures adds fuel to the fire that taxes and interest rates will have to go up,” Russ Mould, investment director at brokerage AJ Bell said via email.
“Both have negative connotations for equities, therefore casting a cloud on the ability for stock markets to keep rallying at the same pace they have enjoyed for much of 2021. However, the Fed has been at pains to stress that it won’t raise rates any time soon, so it is feasible to suggest that we could continue to see burst of energy among stocks for a while yet.”
Elsewhere, bitcoin investors see the fresh spending and money printing as vindication of their belief that bitcoin is a hedge against inflation.
“As the federal government’s stimulus programs continue to infuse trillions of dollars into the financial system, it poses significant economic risks, risks of dollar devaluation and inflation,” Steven Schnall, the chief executive of New York-based digital bank Quontic, said in emailed comments.
“With the Fed adding trillions of dollars to the money supply, it is inevitable that fiat currency will be subject to possible devaluation and there could be significant inflation. We believe that bitcoin could serve as a possible hedge against these occurrences.”