Federal Reserve Chairman warns about the pandemic situation, how will monetary policy affect the Bitcoin market?

This article was published in Wu's Blockchain, author: Rebecca.

Since 2021, U.S. Treasury yields have continued to rise in the first quarter. On March 31, the 10-year Treasury yield rose by 3.75 basis points at the close, reporting 1.7404%. As the "anchor of global assets," U.S. Treasury yields are influenced by the nominal economic growth rate in the U.S. on one hand, and by the Federal Reserve's monetary policy on the other. The monetary policy, in turn, affects the cryptocurrency market, including Bitcoin, through certain transmission mechanisms.

Uncertainties Remain with the Pandemic

The pandemic is currently a decisive factor in U.S. monetary policy. At yesterday's IMF seminar, Federal Reserve Chairman Jerome Powell stated that the Fed should not even discuss adjusting monetary policy until the pandemic is clearly over. "New case numbers are rising, so I just want to urge people to get vaccinated." Currently, about 3 million Americans are getting vaccinated daily, but new variants are driving up new case numbers, especially in large areas of the Midwest and Northeast. The spread of the pandemic is expected to further slow down the economic recovery.

However, vaccination rates are accelerating, and the daily new confirmed cases in the U.S. have significantly decreased from the winter peak. More than 100 million people have received at least one dose of the COVID-19 vaccine, covering over 30% of the U.S. population. The improvement in the U.S. pandemic situation has exceeded expectations. President Biden stated that by the end of May, there will be enough COVID-19 vaccines for all American adults, two months ahead of his previous target.

Nevertheless, the U.S. is indeed facing a fourth wave of the pandemic. The CDC reports that in the past seven days, the average daily new confirmed cases in the U.S. have reached 65,000, an increase of about 10,000 cases per day compared to the two-week low. The variant B.1.1.7, first identified in the UK, now accounts for 26% of confirmed cases nationwide and has become the dominant strain in many areas of the U.S. The CDC believes that with the resurgence of COVID-19 in the U.S., even with accelerated vaccination, cases may still "surge."

Dr. Rochelle Walensky, director of the CDC, even expressed a feeling that "doom is approaching." As normal activities gradually resume in the U.S. and crowds gather, the likelihood of a resurgence of COVID-19 increases sharply. This will inevitably have a huge negative impact on economic recovery.

Overall, it is expected that by autumn, the U.S. may approach full vaccination coverage, as long as no major variants emerge, and monetary policy may begin to adjust in the fall. However, there is also a possibility that variants could wreak havoc in the upcoming winter, which is typically the most conducive season for their spread, so the Fed will be prepared for this.

Short-Term Focus on Stimulus Policies

On March 31, President Biden announced a massive infrastructure and economic recovery plan worth approximately $2 trillion. The extensive infrastructure plan is expected to create "19 million jobs," and the unemployment rate in March fell to 6%, down from 6.2% in February, marking a new low since March of last year. The improved economic growth outlook has further pushed up Treasury yields, leading to high inflation.

In addition, fiscal stimulus policies will exacerbate the imbalance between supply and demand for goods. Fiscal subsidies increase income and stimulate consumer demand, while excessive unemployment benefits slow the recovery of industries, resulting in a situation where demand for goods significantly exceeds supply, thereby driving inflation upward. With fiscal stimulus combined with economic recovery, inflation is expected to gradually rise, increasing the likelihood of tightening monetary policy.

However, before the March FOMC meeting, when the 10-year Treasury yield briefly surpassed 1.7% and caused a decline in U.S. stocks, Federal Reserve officials quickly reassured the market, stating that the rise in the 10-year Treasury yield reflects economic recovery and that the accommodative monetary policy will not change in the short term. Powell also indicated that inflation will rise significantly in the coming months, but that is not enough to guarantee a rate hike by the Fed. Inflation expectations remain firmly anchored around 2%, alleviating market concerns about a shift in monetary policy.

Currently, there are also some bearish views on Treasury yields in the market. Steven Major, head of fixed income research at HSBC, believes that growth rebounds driven solely by stimulus will not lead to a lasting increase in price pressures, predicting that the 10-year Treasury yield will fall to 1% by the end of the year.

Bitcoin May Rise to $83,000 Amid Inflation

On April 1, Bitcoin's price broke above $60,000 for the first time since March 19, 2020. In the first three months of 2021, Bitcoin's price increased by over 100%, with a return rate of 81%. In the recently concluded March, it rose by 27%.

For Bitcoin, an accommodative monetary policy is beneficial and can significantly boost the cryptocurrency investment market. If monetary authorities implement loose monetary policies, more funds may flow into the cryptocurrency market, changing investors' expectations for cryptocurrency prices and causing price fluctuations in the cryptocurrency market. Therefore, adjustments in macro monetary policy may influence the cryptocurrency market through the exchangeability of fiat currency and Bitcoin.

According to a report by the 21st Century Business Herald, the U.S. stock market is currently highly inflated, while the U.S. government is planning to launch a multi-trillion-dollar stimulus plan, causing funds to lose direction, as continuing to push stock prices higher is very risky, but finding new assets for allocation is also challenging. As inflation expectations for the dollar rise, Bitcoin, with its truly limited supply, is increasingly viewed by investors as a hedge against currency risk, leading to a potential surge in the number of new investors entering the Bitcoin market. Vetle Lunde, an analyst at cryptocurrency data company Arcane Research, revealed on Twitter that institutions now hold over 800,000 Bitcoins, accounting for 4.3% of the current supply.

The long-term outlook for Bitcoin is optimistic. Danny Scott, CEO of a UK cryptocurrency exchange, stated on Twitter that the exchange's Bitcoin balance is declining, which is a bullish indicator that could drive Bitcoin to an all-time high of $83,000.

However, a research report from JPMorgan points out that over the past year, Bitcoin's positive correlation with gold, the dollar, and the S&P 500 index has strengthened. Coupled with Bitcoin's high actual volatility, it is more suitable as a risk asset rather than a safe-haven asset. For participants in the cryptocurrency market, while focusing on a single market, they should further pay attention to how macro policy adjustments by monetary authorities affect the entire cryptocurrency market and timely and reasonably adjust their asset structure.
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