Will the Federal Reserve end its fight against inflation?

On Sunday evening, the US authorities, including the Federal Reserve, announced that they fully guarantee the balances at Silicon Valley Bank. With that all investors are protected and with that the US government is taking an action that goes far beyond what most people expected. Macroeconomist Mohamed A. El-Erian notes on Twitter that this could well mean that the Federal Reserve is ending its fight against inflation.

No more rate hikes?

The US Federal Reserve raised interest rates from practically zero to the current 4.50 to 4.75 percent from March 2022 to tackle skyrocketing inflation. That battle is not yet won, because inflation is still reasonably well above the target of 2.0 percent.

In response to the decision to fully guarantee the balances at Silicon Valley Bank, the Bitcoin price shot up, but yields on US government bonds also fell.

Two-year US Treasury bond yields. Source: Mohamed El-Erian

This is actually signaling to the market that they believe that by labeling the collapse of Silicon Valley Bank as a systemic risk, the Federal Reserve is also withdrawing from its fight against inflation. This would put an end to the cycle of interest rate hikes.

What does this mean for Bitcoin?

In principle, this shows the financial system that it is willing to print an unlimited amount of US dollars to keep things afloat. In the long term, this is certainly good for risk assets that have a certain degree of scarcity. In the short term, we just have to hope that no other problems arise.

In the end, we still have to deal with inflation that is slightly too high and we have yet to see whether there are more parties or industries that may have a hard time with the higher interest rates. At least initially, Bitcoin and the rest of the crypto market are responding well to the US government’s decision to intervene.

We are now entering a very interesting period, because inflation is still quite high, but the financial system is also starting to squeak and creak as a result of the Federal Reserve’s rate hikes. In that respect, the coming weeks will be crucial for the further course of 2023.

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