The Fed has become hawkish, according to the economist, as it weighs several rate rises and a reduction of asset purchases in 2022 to confront growing inflation. Kruger emphasizes that if the Fed follows through on its objectives, a shortage of liquidity in the economy might have a detrimental influence on the crypto markets.
“Crypto assets are at the extreme end of the risk spectrum. Just as they profited from unusually loose monetary policy, they now suffer from unusually restrictive monetary policy, as funds move away from riskier asset classes.”
7/ So in less than six months, the Fed went from expecting no rate hikes for 2022 (party goes on)
to expecting three rate hikes, accelerated taper, and discussing accelerated balance sheet normalization.
— Alex Krüger (@krugermacro) January 9, 2022
With Bitcoin (BTC) down more than 40% from its all-time high, Kruger believes the newest consumer price index (CPI) data, which measures inflation, might determine the next phase of the crypto market cycle.
12/ How does that matter for crypto?
Simple. Crypto assets are at the furthest end of the risk curve.
Just as they benefited from extraoridnarily lax monetary policy, they suffer from unexpectedly tight monetary policy,
as money shifts away into safer asset classes.
— Alex Krüger (@krugermacro) January 9, 2022
“We’ll receive US inflation numbers on Wednesday… If CPI shocks to the negative, prices are likely to increase and trend for some time. If CPI shocks to the upside, ‘lights out,’ BTC will reach $30,000. It will be ensured by tradfi [traditional finance]. It’s difficult to say if the figure will come in at 7.1 percent, as predicted. Given the chart, it would sound familiar for bears to try to break the lows, fake a breakthrough, and then launch a ferocious rally. However, cryptocurrency will follow Bitcoin, and Bitcoin will follow equities.”
20/ If the number comes in line with the forecasts, at 7.1%, hard to tell, would make sense for bears to attempt to break the lows, fake breakout, and a rabid rally to ensue given the chart.
That said, crypto will follow bitcoin, and bitcoin will follow stocks.
— Alex Krüger (@krugermacro) January 9, 2022
21/ TL;DR so far
The Fed is saying it is willing to prick the bubble.
The bear case is they do.
The bull case is inflation starts to consistently surprise on the low side, and they don't need to.
Inflation is everything.
— Alex Krüger (@krugermacro) January 9, 2022
Kruger also thinks the Fed is willing to tolerate market downturns in order to maintain inflationary pressure in check.
“The Fed has said that it is ready to puncture the bubble. They do, in fact, have a bear case. The bull thesis is that inflation begins to routinely amaze on the low side when it does not need to. Inflation determines everything.”