Today January 10th, Bitcoin dropped from $42K to $39K and came all the way back in a few minutes:
We already know central banks create narratives to justify actions. Today, the narrative changed from 3 rate hikes to 4, in 2022. However, the impact this potential narrative change had, was a very short term effect. About a minute! We know stocks and Bitcoin can get “choppy” sometimes. But in this case, the instant response to the rate hike change was soo fast, and reversed just as quickly, only to do the same thing again. It signals an inability to decide a direction, doesn’t it?
Meanwhile, $462 Billion in treasury bonds have been issued in the last two months. However, in October 50% of those issuances were being bought up by the Fed. Now, it’s 26%. Thus, rates will have to rise, or else the Fed will have to re-enact QE policies from 2021. Here is the chart of treasury bond issuances:
The Fed can calibrate rather quickly between buying up more treasury bonds or tapering. Based on today’s price action, with S&P 500 swinging the exact opposite of Bitcoin. It stands to reason, if rates are hiked that much this year, stocks will tank, and Bitcoin will rise. Yet, if they reverse course, stocks and Bitcoin may very well rise together. Over the last two weeks we have felt like the Fed may reverse course, as inflation signs are unavoidable and very damaging. However, we know the Fed is trapped. Rate hikes back to back to back to back, is also very damaging. To stock prices, not to mention real estate values! Which poison will the Fed pick?
They can’t go both directions at the same time, they have to choose!
Looking historically, the Fed never lets effective funds rates go negative. To avoid that in 2022, the Fed has their back against the wall. They have to raise rates and fast! This upheavel to lending practices will send real estate and stocks reeling. Investment and Capex budgets will be impacted overnight, once the rate increase is first announced. The second, third, or fourth rate increase only makes it worse. These are expected to be significant increases, although we are not hearing specific targets publicly. Problem is, the negative downside risk of that many rate hikes is severe. We can still see, after the first or second rate hike, the Fed reversing this decision. Once that cat is out of the bag. Bitcoin will catapult! Failing to be able to raise rates is too much signal amongst the noise. Fear will abound! Right now the dollar is up and looking much stronger on the rate hike news! Let’s just see how markets react into April, and May. Probably won’t take that long. Here is some history on fed funds rates with unemployment rates: