There are some people whom we should listen to all the time. For some, it could be their parents, their teachers, or their work boss. In the world of finance, Jerome Powell commands such respect. His words and actions could lead to a market pump or dump. Just in case you didn’t know, he is the current chairman of the Federal Reserve or Fed and he just announced that the FOMC decided to implement a status quo on interest rates. Let us find out how this affects crypto investors.
The FOMC met last September 19-20 to discuss market conditions and what are the best steps to support the general economy. The Federal Open Market Committee is the Fed’s monetary policy-making body. They meet every six weeks to decide the fate of the economy. Powell’s speech regarding the meeting is highly anticipated since it will set the tone for all financial decisions going forward.
Salient Points of the FOMC Meeting
- One of the most important points of the meeting is the decision to pause rate hikes – for now. The FOMC decided to keep the rate at 5.25 to 5.5%. This is the first time that this committee has left the rates unchanged since March of last year.
- The Fed Chair reiterated their mandate to “promote maximum employment and stable prices for the American people”.
- Stable prices mean that inflation should be cooled down to 2%, which has been the target of the Fed from the start. This target is a widely accepted benchmark by central banks.
- The rates will not change, however, the Fed will continue to reduce security holding which is actually bad since it may reduce money circulating in the market. We will get into the details later.
Things to Remember – CPI and Labor Data
Jerome Powell said that it is their mandate to promote maximum employment and stable prices for the American people. Employment means people have a stable income, while stable prices mean making sure that the price of commodities doesn’t fluctuate too much. But how exactly do they do this and how do they know they are meeting their goals? The Bureau of Labor Statistics (BLS) monitors these two metrics.
- The consumer price index (CPI) is a measure that monitors the prices paid by urban consumers for a basket of goods and services – about 80,000 items. It varies from gas prices to fruits, and doctor visits. The BLS collects the data on a monthly basis.
- The latest CPI data shows a +0.6% for August 2023.
- For employment the BLS produces the monthly Current Employment Statistics (CES). Current data shows that non-farm payroll increased by 187,000, while unemployment rose by 3.8%. in August.
Let us Tie Up the FOMC Decision and Data
At first glance, the Fed’s decision seems good since it will not increase the interest rates. However, this is not the whole story. The Fed’s decision was based on its assessment of the economic outlook and the risks and opportunities for the recovery. The Fed said that it expects inflation to moderate in the coming months and that it will continue to monitor the data and adjust its policy accordingly.
Why is it good that the Fed will not increase the interest rates? Because if the Fed keeps on increasing the interest rates, it will further restrict the money supply in the market. Higher interest rates will discourage investors and businesses from borrowing money, which means less funds for investments and business expansions. But we have to remember that current rates are already high.
Powell also said that the Fed will keep on decreasing security holdings. What are security holdings? These are bonds sold by the US government to fund its expenses. When the Fed buys securities from the government, it is also giving money in exchange. If the Fed stops doing this, there will be less money circulating in the economy.
So, the present high-interest rate is retained, and the money supply will be restricted because of the decision to decrease security holdings. In short, they will still be limiting the money supply. This is not bullish at all.
How Does Labor Data Come into The FOMC Decision?
It is a good idea to make sure that everybody has a stable job with high salaries, right? However, it is more complicated than it sounds. Do you remember the 2% inflation target that the Fed aims for? If the labor market is hot and salaries are at an all-time high, this will increase inflation.
For example, if there are too many jobs available compared to the number of available workers, companies will compete with each other to attract employees. They will do this by offering better compensation. Sounds good right? But better compensation will also translate to higher operating costs, which would mean higher prices for goods and services. This will increase inflation.
That is the reason why the Fed also looks at labor data to manage inflation. If the labor market is too hot, they will restrict the money supply by raising interest rates so businesses will scale down operations. If the economy is not growing, then they will do the opposite by lowering interest rates.
But Should Crypto Investors Care?
For a lot of crypto investors, investing in digital assets is an escape from the fault of the current monetary system. So why should the digital asset community care about the FOMC’s decision?
Unless you are one of the crypto OG’s and have already banked substantial assets, you will probably be affected by whatever the Fed says. We are all patiently waiting for the bull run, right? The amount of money circulating in the economy would determine if we will have a parabolic move. Big investors won’t buy into a risky asset class like crypto if the capital is not available. Higher interest rates will also mean that US treasuries will be more appealing than digital assets.
It sounds complicated, but it can be summarized by looking at the overall money supply. Remember, less money in the economy equals less money for risky investments like crypto. More money equals more dry powder to buy into more digital assets.
So in inclusion, we should all listen to Powell when he delivers the FOMC’s decision. He and the FOMC hold the key to unlock the door that is holding back the bull run.
Powell’s speech:
