Fed Speeds Up Stimulus Withdrawal, and Bitcoin Jumps

Federal Reserve officials took steps to accelerate the withdrawal of the unprecedented monetary stimulus used to prop up markets in the wake of the coronavirus, acknowledging the growing threat of inflation now at a 39-year high.

The U.S. central bank meeting was being closely watched by digital-asset traders because many bitcoin investors see the cryptocurrency as a hedge against the potential debasement of the dollar that might result from the monetary stimulus, which is facilitated by Fed money printing. So a faster withdrawal of the stimulus might provide an extra headwind for bitcoin prices.

But bitcoin (BTC) prices jumped after the Fed decision was announced at 2 p.m. ET (19:00 UTC), signaling that traders may have been worried about an even more aggressive withdrawal of the stimulus and faster interest rate increases next year. The bitcoin price had fallen 15% just in December alone.

“The market went down before the fed announcement, so it’s probably correcting now,” Merav Ozair, a professor in the finance and economics department at Rutgers Business School, told CoinDesk in a phone interview. “Inflation is coming for sure, and we see it.”

As of press time the largest cryptocurrency by market capitalization was up 3.7% over the past 24 hours to about $48,700.

According to a statement Wednesday, the Fed will double the pace of tapering its monthly bond purchases, reducing them by $30 billion every month until they’re completely wound down early next year. Under the Fed’s previous plan, it would have withdrawn $15 billion of the stimulus every month to wind down the program by the middle of next year. For most of the past couple of years, the Fed has been printing money to buy about $120 billion of bonds a month.

A quicker winding down of the asset purchases could allow the Fed to proceed more quickly to start raising interest rates for the first time since 2018. After the spread of the coronavirus in March 2020 began to hit global markets and economies, the Fed cut interest rates to close to zero and has held them there since then.

“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” the Federal Open Market Committee, as the Fed’s monetary-policy committee is known, said in the statement.

At a press conference on Wednesday after the decision was announced, Federal Reserve Chair Jerome Powell said the asset purchases would end by mid-March, a few months earlier than communicated just last month.

“The economy no longer needs increasing amounts of policy support,” Powell said.