How will Powell's re-election as Fed Chairman affect cryptocurrencies?

Wall Street was relieved by news that President Joe Biden will renominate Federal Reserve Chairman Jerome Powell for another four years. The Fed's rate cuts and its measures to support the economy have helped the U.S. avoid a long recession during two turbulent years under the pandemic, earning Powell praise from professional and amateur investors alike.

Now, Powell faces new challenges: accelerating inflation, growing supply-chain disruptions and the need to scale back some of the help provided during the worst of the pandemic.

The Fed chair's primary responsibilities are to keep prices stable, guide decisions about when to raise or lower interest rates and help keep as many people employed as possible. As a result, what the Fed does and Powell's reelection affect nearly every aspect of Americans' daily financial lives, from their home-buying goals to their retirement savings to the prices they pay for groceries.

Keith Lerner, chief market strategist at Truist Consulting Services, said Powell's re-election is a sign that loose monetary policy will continue. "This is good news for people investing for retirement and 401(k) plans," he said, but the Fed chairman is just one of many factors affecting the market and investment, he said: "There are also epidemic trends, economic trends and supply chain factors."

So, what impact will Powell’s re-election have on the crypto industry?

Prices of risky investment assets such as cryptocurrencies have surged over the past two years, fueled by low interest rates, rising consumer savings and U.S. government stimulus.

Bitcoin's price has nearly doubled since the beginning of the year, and if Powell delays raising interest rates, investors may remain enthusiastic about such high-risk investments.

There is also the argument that cryptocurrencies can be a hedge against inflation. Proponents say that because digital currencies have a limited supply, they cannot depreciate in value, unlike the dollar or other traditional currencies.

Douglas Boneparth, president of wealth management firm Bones Wealth, said overall, there is uncertainty about how the market will perform without additional support from the Fed, which will test retail investors' portfolios.

“It’s one of the primary tools used to sustain stock market prices,” he said. “When you take one of those crutches off and see whether the economy can walk on its own, investors will find out how durable their portfolios really are.”

In 2019, Powell publicly called Bitcoin a "speculative store of value, like gold." In March of this year, when the price of Bitcoin exceeded $60,000 for the first time, he said at the Bank for International Settlements Innovation Summit that "Bitcoin assets are very volatile and therefore not very useful as a store of value." He concluded: "It is essentially a substitute for gold, not a substitute for the dollar."

While Powell doesn’t see Bitcoin as a real threat to the dollar, that doesn’t mean he’s letting the broader cryptocurrency issue slide.

In November 2019, Powell first told Congress that the Fed was studying central bank digital currency (CBDC) for use by businesses and households. The U.S. CBDC, also known as the digital dollar, could use blockchain or other technologies to enable faster and simpler payments.

But they could also eliminate the need for stablecoins, which are currencies pegged to fiat currencies. “If you have a digital dollar, you don’t need stablecoins, you don’t need cryptocurrencies,” Powell said in July.

Powell said in September that he believed stablecoins were like money market funds or bank deposits and should be regulated.

Stablecoins remain a source of concern for the Federal Reserve Chairman, as well as U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler and Treasury Secretary Janet Yellen, who have formed a working group to initiate a regulatory framework for dollar-pegged assets. The group has called for more regulation of stablecoins.

Image source: Internet

Author: Amy Liu