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Over the past seven months, Powell and other officials at the U.S. central bank have repeatedly used that term to suggest that the forces driving recent consumer-price increases might abate as the economy accelerates from coronavirus-related lockdowns.
So the shift in messaging by Powell, during testimony before a U.S. Senate panel, might signal that authorities now see the inflationary pressures as longer-lasting – potentially indicating that the central bank might be less willing to continue the loose monetary policies that have buoyed markets for risky assets, including cryptocurrencies.
“It is time to retire the word ‘transitory’ regarding inflation,” Powell said during the hearing before the Senate Banking Committee.
Bitcoin’s price slid to about $57,000 as of press time, down from about $58,500 before the hearing started.
Bitcoin as inflation hedge – and risky asset
The largest cryptocurrency is viewed by many investors as a hedge against inflation – based on the idea that its supply is tightly controlled by the programming built into the underlying blockchain. That hard-coded process is contrasted with the human-decided monetary policies of the Federal Reserve, which has ballooned its balance sheet to about $8.7 trillion, more than double where it stood in early 2020.
But bitcoin is also seen as a risky asset, so there’s also a view among traders that loose monetary policies encourage investors to make bigger speculative bets. A reversal of these “dovish” policies might prove a tailwind for bitcoin.
At a Fed meeting earlier this month, Powell and other officials announced a plan to “taper” their $120 billion of monthly bond purchases – a form of monetary stimulus – by $15 billion a month.
The announcement was seen as an acknowledgement that officials needed to move sooner rather than later to tamp down inflation.
6.2% in October
Since April Federal Reserve officials have been attributing fast-rising consumer prices to “transitory” factors that ostensibly would dissipate once the economy normalized.
But inflation has continued to rise - with the closely-tracked Consumer Price Index climbing 6.2% in October compared with 12 months earlier. That was the highest pace in three decades, and economists were quick to warn that the price increases weren’t likely to reverse anytime soon.
In prepared remarks ahead of the Senate hearing, Powell said that “most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate.“
During the live hearing on Tuesday, Powell acknowledged economists’ recent predictions that the Fed may need to accelerate the tapering of its monthly bond purchases – to keep inflation from overheating. The U.S. central bank’s final monetary-policy meeting of this year is scheduled for Dec. 14-15.
“It is appropriate, I think, for us to discuss at our next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” Powell said Tuesday, according to according to Bloomberg News.
Bitcoin and omicron
In the prepared remarks, Powell addressed the growing concerns about the recently-emerged omicron variant of the coronavirus.
“It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year,” Powell said. “In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace.”
The upshot could be mixed for bitcoin: Rising prices could bolster the cryptocurrency’s appeal as an inflation hedge, but a more hawkish monetary policy on the part of the Fed might prove a headwind.