The Federal Reserve made waves in the past week. The Fed increased its GDP forecast for this year to 6.5% from the 4.2% prediction it had made in December 2021. But despite the newfound optimism in the market, Chairman Jerome Powell and his board do not have any plans to increase short-term interest rates until 2023 at the earliest.
There is no short-term plan to scale back the $120 billion in bond purchases the Fed gobbles up each month. In the meantime, the Fed’s statement acknowledged that “Inflation continues to run below 2%,” which is the bank’s published target.
The plot thickens as the Fed’s projections show that inflation is possibly surging as high as 2.4% by the end of 2021. However, Powell puts worries of imminent tightening to rest by mentioning that he was expecting the inflation this year to be “transient.”
Interestingly, the Fed does not plan to overreact by hiking rates and possibly interfering with the recovery when the inflation is a one-off event and not a consistent trend. In summary, inflation is expected to be a short-term blip at most, the economy appears to be recovering faster than expected, and the Federal Reserve is keeping all monetary spigots flowing freely.
What Did The Fed Say?
Bond yields soared to reach their highest levels since the onset of the pandemic, with the 30-year yielding 2.5% and the 10-year Treasury now yielding 1.7%. Even after the surge, the 10-year yield is significantly below the Fed’s inflation estimate for the year, and the 30-year yield is higher by just 0.1%.
The federal reserve basically promised falling negative real rates for the next two years.
Brilliant for #Gold & #Bitcoin
— Marrrk J. Valek (@MarkValek) March 17, 2021
It means that most bond investors will lose some money this year after adjusting their returns for inflation. But, all is not lost. It seems like the Fed is blazing new trails here.
The Chairman of the Federal Reserve just finished his speech.
He basically told everybody to buy #Bitcoin
😂 True story 🤷🏻♂️
— Bitcoin Archive 🗄🚀🌔 (@BTC_Archive) March 17, 2021
There has never been central bank intervention on this scale ever before. Even if you are not a congenital dollar bear, this scenario brings into question the dollar’s role as a long-term store of value.
If you are assured to lose your money holding dollars in real and inflation-adjusted terms, you are encouraged to find other havens for your money including bitcoin. Traditionally, gold and hard currencies like the Swiss franc have been a haven to shield portfolios against inflation and currency debasement.
But these days, it appears like the Swiss Franc is not a better currency steward than the US dollars. The Swiss National Bank has is equivalent to the Fed funds rate put at -0.75%. Apart from inflation worries, investors will lose three-quarters of a percent to negative interest rates for the pleasure of holding their savings in francs.
This leaves gold and bitcoin as the functional haven assets in the global markets.
Bitcoin, Gold, Or Cold Hard Cash?
Before dumping dollars and go on to back up the proverbial truck on bitcoin and gold, investors are advised to do their research well since both assets are great diversifiers. But most of the real-world transactions and expenses are paid in dollars. Hence, people will need to keep fiat currencies until bitcoin goes mainstream.
Gold has not been acting up to standards lately. Its price is currently down by almost 16% from its August 2021 peak. The plunge has happened despite the Federal Reserve’s relentless pumping.
The swings in bitcoin are the stuff made of legends. Bitcoin peaked around $20,000 in late 2017 before rolling over and then losing over 80% of its value. It has had some explosive mini booms and busts in the years that have followed.
For now, the bitcoin story is quite appealing. It is the currency that central banks cannot debase. However, it is also a new concept in the long timeline of financial history, and there is no strong assurance that something new and highly improved will not come along and replace it in the future.
So, it is advisable to put some money in gold and some in bitcoin which is what the Fed is indirectly advising investors to do at this point. But, any sensible investor should keep their position sizes reasonable, and remember that many other assets like real estate and stock may serve as currency hedges as well.
