According to the US bank JPMorgan, the Federal Reserve plans to pay as many as 2 trillion dollars into the US banking system. The Fed comes up with the plan after three major US banks failed last week due to lack of liquidity; Silvergate, Silicon Valley Bank and Signature Bank.
Banks in trouble
The monetary policy of the US Federal Reserve, characterized by rising interest rates over the past year, has had major effects. It has drained a lot of liquidity from banks. Rising interest rates have caused a transition from cash deposits to money markets.
The fall in reserves at banks has resulted in the necessary risks. This lack of reserves was the reason that the three aforementioned banks were unable to process the large volumes of withdrawals.
It seems that the American banks have the water on their lips. The question is therefore whether they would survive a further rise in interest rates. The Fed’s cash injection aims to stabilize the US banking system. There are also rumors that the Fed will skip next week’s expected rate hike.
What does this mean for bitcoin?
The question is what consequences this monetary turnaround will have for the crypto sector. In general it is good news, more liquidity means more money available. This can be one spillover effect, and result in a rising bitcoin price. Whether this will happen in the short term is uncertain.
However, if the Fed maintains this course and slowly reduces interest rates, this is cause for optimism in the long term. Low interest rates and more liquidity generally create an attractive economic environment for risky investments.
In October we already speculated about this exact situation. The only way for the Federal Reserve to cut interest rates is to print an awful lot of money and buy up their own debt. This gigantic injection of new money, which we seem to be experiencing at the moment, will result in a sharp rise in inflation.
The only safe place for capital in such a situation is in scarce assets over which the Federal Reserve has no control. The rise in the bitcoin (BTC) price over the past few weeks seems to be the first reaction to this recent macroeconomic change.