The Bitcoin Layer

The Bitcoin Layer

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The Bitcoin Layer
The Bitcoin Layer
Fed to hike rates in March

Fed to hike rates in March

What to expect from monetary policy over the next six months. Implications for bitcoin.

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Nik Bhatia
Jan 27, 2022
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The Bitcoin Layer
The Bitcoin Layer
Fed to hike rates in March
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In December 2021, only a few months after El Salvador moved to adopt bitcoin, truest of true OG bitcoin media personalities Stacy Herbert and Max Keiser decided to move to the country. Max Keiser famously advocated for bitcoin as a way to disrupt the financial oligarchy as early as 2011 when it traded at around $1, and the power couple continues to walk the bitcoin walk by relocating to El Salvador.

Image
Max and Stacy making pupusas in El Salvador

However, I’d like to strongly disgree with Stacy’s takes this week. All in good spirit of course! Let’s start with Monday’s original tweet as stocks were getting bludgeoned during the morning session:

Twitter avatar for @stacyherbert
Stacy Herbert 🇸🇻 @stacyherbert
Does the Fed walk back their threat to raise rates today? Or tomorrow? They will never raise rates, of course, because you can’t taper a ponzi.
Twitter avatar for @DeItaone
*Walter Bloomberg @DeItaone
U.S. STOCK INDEXES EXTEND DECLINE, NASDAQ NOW DOWN 4.1%
5:11 PM ∙ Jan 24, 2022
171Likes26Retweets

In this publication, we have discussed the Fed’s unofficial third mandate and how falling equity prices frequently drive the Fed to ease. So Stacy’s take is on theme, but it underestimates the Fed. My response was:

Twitter avatar for @timevalueofbtc
Nik Bhatia @timevalueofbtc
@stacyherbert this is nothing, they will still hike in March
5:12 PM ∙ Jan 24, 2022

The Fed on Wednesday assured the market it won’t be hiking by 50 basis points in March or rolling off the balance sheet with any immediacy, but the Fed is committed to hiking rates this year, and likely multiple times. This response from Stacy was confusing, but more confusing was the number of people that agreed with this idea that the Fed will not hike rates because falling stock prices won’t allow them to:

Twitter avatar for @stacyherbert
Stacy Herbert 🇸🇻 @stacyherbert
Told you @timevalueofbtc 😂😂
Twitter avatar for @zerohedge
zerohedge @zerohedge
Dovish: not ending qe early no rate hikes early no mention of 50bps hike
7:12 PM ∙ Jan 26, 2022
52Likes4Retweets

Sorry, no you didn’t.

The Fed is absolutely going to hike rates by 25 basis points in March. It will almost certainly do the same in June. After that, it’s anybody’s guess what will happen, but let me provide you with a few reasons why the first 50 basis points of monetary tightening are all but guaranteed.

  1. The market is pricing in five hikes this year. Monetary policy must look at current data. Today, there is only one statistic that matters to the Fed: 7% inflation. More on the path of inflation levels in later posts, but a 7% rate is somewhat embarrassing for the Fed, which carries price stability as an official legislated mandate. The Fed must maintain some credibility here and appear to combat these price level increases. The Fed does plenty of talking between meetings so that it can move markets in line with its intended policies, and it has told the market that a quarterly 25 basis point hiking schedule, similar to the one that started in 2015 (and ended abruptly in 2018), is what to expect. Whether we get all five hikes is anybody’s guess, but we will certainly see the Fed follow through with 50 basis points by the June meeting. Here is a picture of the expected hiking schedule based on money market rates as of this morning:

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