Fed Monetary Policy Is Positive For Cryptocurrencies By Investing.com

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Investing.com – The past few months have not been easy for cryptocurrencies. Well-known Allianz economist Mohamed El-Erian thinks they could now benefit from the Fed’s hawkish policy.

In an interview with CNBC yesterday, the Economist spoke about the US economy, markets, and the Federal Reserve’s response to inflation, as well as the impact on Bitcoin and other cryptocurrencies.

“I think the markets have understood that we have three problems. The first is that we have consistently high inflation. Second, the Fed is way behind, and third, the road to orderly disinflation is quite narrow,” he explained.

Because of these factors, companies are now asking questions about growth, according to the economist. He noted that investment bank Goldman Sachs (NYSE:) said on Monday there was a 35% chance of a recession over the next two years. El-Erian pointed out, “It’s an announcement, 35%.”

“The big question is whether we can continue to grow despite the turmoil of inflationary growth,” he observed, adding, “Banking CEOs are worried about the macro environment.”

Liquidity impact vs diversification impact

Cryptocurrencies have deteriorated in recent months and regarding the long-term outlook, El-Erian said the following:

“I think the concern for cryptocurrencies is that the drop is happening at a time when it’s rising and getting close to $2,000. Because the big argument for crypto is that it’s a diversifier. In times of inflation, it’s attractive, and lately crypto hasn’t played that role.

The Economist explained, “There is a reason for this and that is that unlike gold, crypto has benefited immensely from all the liquidity injections. So what you get with crypto is torn between recognizing that liquidity is flowing out of the system as a whole and desiring it as a diversifier. So far, the liquidity element has prevailed.

He continued:

“What we’re seeing across the board is that value is being restored, and that’s a good thing. You see it in stocks, bonds, and cryptos.

“We are simply adapting to a new paradigm where liquidity is no longer plentiful and unpredictable,” he added.

The Fed as the next big bullish factor for Bitcoin, Ethereum & Co?

El-Erian was also asked what would force the Federal Reserve to change its inflation target and what that target would be.

“What would force them to change their goal would be to realize that they can’t achieve their goal because you’ve waited too long. Your credibility is at risk,” he replied. they were braking too hard, they are pushing the economy not just into a short-term recession but into a longer-term recession.”

He therefore predicted that “they will be very tempted and many people will push them to increase the target by 2% to 3% as an escape. This solution will not be easy to implement and will be incredibly controversial.”

When asked what to expect from cryptocurrencies and gold if the Fed actually acts as he predicted, he concluded, “They will both go up.”

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