Crypto Prices Moved Higher Following Powell’s Congress Testimony on Inflation

Just a few days ago, the crypto world was looking with interest at the testimony of Jerome Powell in front of the U.S. Senate. The Chairman of the Federal Reserve appeared in front of the Committee on Banking, Housing, and Urban Affairs on January 11th.

The testimony inaugurated the beginning of Powell’s second term leading the Federal Reserve. As the inflation rate appears to pick up in the Western world, many are looking at the Fed to learn about its future guidance.

Among the observers, the crypto market also had its reason to follow Powell’s testimony. Expecting tighter monetary policy, hence a reduction in liquidity, crypto investors have rushed to sell coins lately.

This article will highlight Powell’s main statements in front of the Senate and share some thoughts on the crypto market’s immediate reaction.

What did Powell tell the Senate?

“Today the economy is expanding at its fastest pace in many years, and the labour market is strong”, pointed out Powell. Finally, the chairman shared his thoughts on inflation, reminding the Fed to “prevent higher inflation from becoming entrenched.”

An important matter to underline is that the Federal Reserve legally follows three mandates:

  • Sustaining economic growth
  • Regulating price stability
  • Keeping long term interest rates at a moderate level

This is not trivial, as other central banks worldwide sometimes only focus on price stability with an exclusive mandate. In other words, the Fed observes an encouraging economic growth, with no rush to stop a transient increase in inflation.

With no mention of economic growth in the mandate, Powell may slow down the economy to tackle inflation.

The reaction of the crypto market

The immediate reaction of the crypto market to Powell’s testimony was pretty weak. However, the Fed message was clear: the U.S. can afford a short period of inflation as the economy grows.

A few hours after Powell’s testimony, the market received the official data on Consumer Price Index (CPI) for December 2021. Investors positively welcomed the information with a yearly inflation rate measured at 7%.

A 7% annual price increase appears gigantic compared to the past years, but the market was preparing for the worst. A higher inflation rate would have taken the Fed by surprise, pushing the central bank towards a faster tapering.

Advisors at Goldman Sachs (GS) are predicting four interest rate hikes by the Fed in 2022. The current interest rates range between 0% and 0.25%, so GS expects rates to reach 1-1.25% by December.

Financial markets typically do not dislike the tightening policy per se but the lack of political stability. Yet, in a few months, Wall Street has seen a rapid increase of interest rate hikes predictions.

The crypto market hopes that Powell’s testimony can rest the speculations over an even faster monetary tapering.

A momentary price increase

As many hoped that the crypto market had bottomed before Powell’s testimony, recent events proved optimistic traders wrong. On Friday, Bitcoin (BTC) saw its price fall below $40,000, reaching a six-month low.

Following the typical high positive correlation of altcoins with BTC, most other tokens followed a similar path. As a result, nearly all of the primary tickets on the market have not had a moment of peace since November 2021.

By chance, prices have not started to move lower since mid-November. In fact, on November 8th Goldman Sachs shared a report predicting interest rate hikes in the U.S.

The Fed’s fear would disregard economic growth to cool down inflation pushed the financial world into a bearish phase. Unfortunately, while Wall Street still indicates that we are in the middle of a simple market correction, crypto traders are not proving to be patient.

While volatility has its perks during bullish market phases, few investors are prepared to record high losses, even momentarily. The typical fast pace of the crypto market can easily lead to a selloff, as we have seen over the recent weeks.

Final thoughts

Powell’s message to the financial markets was clear: the economy can afford momentarily high inflation. However, the fact that the Fed only managed to give a short boost to the demands shows the actual fear of investors.

Traders are not sure that the current inflation rate will be momentary. The feeling is that the situation will not change until CPI readings will move lower. The Fed’s communication strategy has not been impeccable, with a quick turnaround on the matter in December.

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The sense of political instability is making investors nervous, and the importance of the January CPI is increasing every day. The blockchain market has several innovations coming, but it proved that its destiny is still tightened to traditional finance.

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