Fed's Moves: Brewing Financial Crisis?

 

Bitcoin specifically, alongside other crypto prices, has bounced back from its 2022 price crash, with a U.S. dollar “paradigm” shift underway that could potentially rock the financial system.

• BTC price has climbed by around 80% over the past 12 months.
• However, the cryptocurrency’s price has crashed by around 20% since the approval of ETFs.
• BTC has suddenly rebounded from a crash under the $40,000 mark.
• The coin climbed back from what some thought was a “critical” price level.

U.S. elections are currently in the spotlight, which will eventually reflect on the markets.

Now, as Donald Trump quietly leans into bitcoin and crypto, the markets can expect the U.S. Federal Reserve to put an end to its funding lifeline for banks. Some traders are warning that this could, in turn, spark a “financial crisis” and force the Fed to restart its money printer.

Yellen or Talkin'?

Fed’s Powell and Treasury’s Yellen could be about to accidentally spark a huge bitcoin and crypto price earthquake.

"The cessation of the BTFP [bank term funding program] will cause a mini-financial crisis and force the Fed to stop 'Talkin’' and start 'Yellen' with a rate cut, tapering of QT [quantitative tightening], and/or a resumption of money printing via quantitative easing (QE)," wrote Arthur Hayes in his blog post.

Hayes, founder of Bitmex, is known for his very strong opinions across the cryptocurrency space.

Hayes has put his short-term bitcoin price prediction between the $30,000-$35,000 range. However, he anticipates that after reaching this range, the price is likely to rebound or increase later this year.

"The Fed would rather just jawbone the markets with speeches and Wall Street Journal op-eds because they are deathly afraid of inflation.", said Bitmex founder.

This week, the Fed has confirmed rumours that its $160 billion bank term funding program will indeed come to an end in March. For context, this program was created with the approval of Treasury Secretary Janet Yellen amid last year’s U.S. banking crisis.

What almost became a full-blown banking meltdown last year was most likely triggered by the Fed’s rapid series of interest rate hikes as an attempt to battle inflation – which resulted in piling pressure on bank balance sheets that had become overextended during the ultra-loose monetary policies of the Covid19 era.

Hayes predicts banks will continue to struggle "until rates are reduced," adding, "there is no way these banks can survive without the government support provided via the BTFP."

Meanwhile, BTC and crypto traders – who have been heavily immersed in the Wall Street spot BTC ETF drama over the last few months – are starting to turn away from tracking the product flows.

"Even if bitcoin ETF inflows disappoint, this is not the time to turn bearish as the macro environment will remain a tailwind in 2024, and the U.S. election cycle will see a constructive fiscal response that will lift asset prices higher," Markus Thielen, head of research at 10X Research, wrote in an emailed report.

The Federal Reserve’s decision is expected later this week, and is unlikely to cut rates at its upcoming meeting on January 30-31.

It is essential to know that the Fed has kept rates unchanged since July 2023, after increasing them to a 22-year peak of 5.25%-5.50% in order to combat inflation.

However, even as inflation seems to have peaked out, investors expect the Fed to start to ease monetary policy only from its March meeting, with nearly half of traders polled by CME’s Fedwatch forecasting an interest rate cut then.