Powell warns of the US epidemic situation and how monetary policy will determine the trend of Bitcoin

Wu said the author | Rebecca

Editor of this issue | Colin Wu

Since 2021, the U.S. Treasury yield has continued to rise in the first quarter. On March 31, the 10-year Treasury yield rose 3.75 basis points to 1.7404% at the end of the trading day. As the "anchor of global assets", the U.S. Treasury yield is affected by the nominal economic growth rate of the United States on the one hand, and the monetary policy of the Federal Reserve on the other. Monetary policy affects the Bitcoin and other cryptocurrency markets through a certain transmission mechanism.

1. There are still uncertainties in the epidemic

The epidemic is the decisive factor in the current US monetary policy. At the IMF seminar yesterday, Federal Reserve (US central bank) Chairman Powell said that the Fed should not even discuss adjusting monetary policy until the epidemic is clearly over. "The number of new cases is rising, so I just want to urge people to get vaccinated." Currently, about 3 million Americans are vaccinated every day, but new variants are driving up the number of new cases, especially in large areas of the Midwest and Northeast. It is expected that the spread of the epidemic will further slow the pace of economic recovery.

But vaccination is accelerating. The number of newly confirmed cases in the United States has dropped significantly from the peak in winter. More than 100 million people have received at least one dose of the new crown vaccine. The vaccination doses cover more than 30% of the U.S. population. The improvement of the epidemic in the United States has exceeded expectations. U.S. President Biden said that by the end of May, the United States will have enough new crown vaccines for all American adults, which is two months ahead of his previous goal.

However, the United States is indeed experiencing a fourth wave of the epidemic. According to data from the Centers for Disease Control and Prevention (CDC)[1], over the past seven days, the United States has averaged 65,000 new confirmed cases per day, an increase of about 10,000 cases per day from the lowest point two weeks ago. The mutant virus B.1.1.7, first discovered in the UK, has accounted for 26% of confirmed cases in the United States and has become the main virus in many parts of the country. In the view of the CDC, as the COVID-19 epidemic in the United States rebounds again, even if vaccination is accelerated, cases are still likely to "surge."

Dr. Rochelle Walensky, director of the Centers for Disease Control and Prevention (CDC), even said that there was a feeling of "impending doom". As the American people gradually resume their normal activities and large numbers of people gather and come into contact, the possibility of a recurrence of the COVID-19 epidemic has skyrocketed. This will inevitably have a huge negative impact on economic recovery.

But in general, the U.S. vaccine may be close to full coverage in the fall, and as long as there is no major variant virus, monetary policy may begin to adjust in the fall. But there is also a change that the variant virus may wreak havoc in the coming winter, when it is most likely to spread, so the Federal Reserve will make good expectations.

2 Short-term stimulus policy

On March 31, US President Biden announced a massive infrastructure and economic recovery plan of approximately US$2 trillion. The huge infrastructure plan will create "19 million jobs" and the unemployment rate in March dropped from 6.2% in February to 6%, the lowest since March last year. The economic growth prospects have further pushed up Treasury yields, leading to high inflation.

In addition, fiscal stimulus policies will exacerbate the imbalance between supply and demand of goods. Fiscal subsidies increase income and stimulate consumer demand, while excessive unemployment subsidies slow down the pace of industrial recovery, causing demand for goods to significantly exceed supply, thereby driving up inflation. With fiscal stimulus and economic recovery, inflation will gradually rise, and the possibility of tightening monetary policy will increase.

But before the March FOMC meeting, when the 10-year Treasury yield broke through 1.7% and caused the US stock market to fall, Fed officials quickly came out to give the market a "reassurance", believing that the rise in the 10-year US Treasury yield reflects the economic recovery and will not change the loose monetary policy in the short term. Powell also said that inflation will rise sharply in the coming months, but that is not enough to guarantee the Fed to raise interest rates. Inflation expectations are firmly anchored at around 2%, eliminating market concerns about changes in monetary policy.

There are also some views in the market that are contrarian and bearish on US Treasury yields. Steven Major, head of fixed income research at HSBC, believes that the growth rebound brought about by stimulus alone will not trigger a lasting rebound in price pressure, and predicts that the 10-year Treasury yield will fall to 1% by the end of the year.

3 Bitcoin may rise to $83,000 amid inflation

On April 1, the price of Bitcoin rose above $60,000 for the first time since March 19, 2020. In the first three months of 2021, the price of Bitcoin rose by more than 100%, with a return rate of 81%. In the past March, the cumulative increase was 27%.

For Bitcoin, loose monetary policy is beneficial and can significantly boost the crypto investment market. If the monetary authorities implement loose monetary policy, more funds in the market may flow into the cryptocurrency market, changing investors' expectations of cryptocurrency prices, and thus causing fluctuations in cryptocurrency market prices. Therefore, adjustments to macro monetary policy may affect the cryptocurrency market through the convertibility of real currency and Bitcoin.

According to the 21st Century Business Herald, the U.S. stock market is already highly bubbled, and the trillion-dollar stimulus plan that the U.S. government is planning to launch has caused funds to lose direction, because it is very dangerous for stock prices to continue to rise, but it is also challenging to find new assets to allocate. When expectations of U.S. dollar inflation rise, Bitcoin, as a currency with a truly limited supply, more investors will allocate Bitcoin as an asset to hedge currency risks, and the number of new investors pouring into the Bitcoin market may increase significantly. Vetle Lunde, an analyst at crypto data company Arcane Research, revealed on Twitter that institutions already own more than 800,000 Bitcoins, accounting for 4.3% of the current supply.

The long-term trend of Bitcoin is optimistic. Danny Scott, CEO of a British cryptocurrency exchange, said on Twitter that the exchange's Bitcoin balance is declining, which is a bullish indicator that may push Bitcoin to a record high of $83,000.

However, a research report by JPMorgan Chase pointed out that the positive correlation between Bitcoin and gold, the US dollar and the S&P 500 index has increased over the past year. Coupled with the high actual volatility of Bitcoin, Bitcoin is more suitable as a risk asset rather than a safe-haven asset. For participants in the cryptocurrency market, while paying attention to a single market, they should pay more attention to the impact of the adjustment of the monetary authorities' macroeconomic policies on the entire cryptocurrency market and adjust their asset structure in a timely and reasonable manner.

[1] https://edition.cnn.com/2021/04/02/world/coronavirus-newsletter-intl-04-02-21/index.html

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