Crypto markets fell at the end of the week in what appeared to be a reaction to Fed Chairman Jerome Powell’s speech in Wyoming.
Bitcoin was down 4.98% in the past seven days at the time of writing, according to CoinGecko, trading hands for $20,087. Meanwhile, Ether lost 5.32% over the same period, trading below $1,500 to $1,492. Bitcoin fell below $20,000 on Saturday, while either slipped below $1,500.
Among other notable losses, uniswap lost more than 15% last week, while solana and avalanche lost just under 10%. Some tokens have beaten the trend to post gains over the past seven days, including EOS and Polygon – up 8.3% and 5.2% respectively.
However, overall the market is trending lower as it flirts with diving below the $1 trillion global market cap. The fall in crypto prices was broadly in line with traditional financial markets, with the Nasdaq falling almost 4%, while the S&P 500 recorded its biggest daily decline in over 2 months, dropping 3.37% Friday.
Fed Stance Creates Problems for Crypto
The Block asked Garett Jones, associate professor of economics at George Mason University, what the Fed’s aggressive rate hikes could mean for inflation and, therefore, digital assets. According to Jones, most of the time, crypto acts as a speculative asset when it comes to price, which means it’s useful to think of it as a “super risky stock.”
Stocks typically get hammered when the Fed decides to fight inflation, he said, and Wall Street has either forgotten how difficult it has been for rich countries to fight inflation of 5 % to 10%, or simply convinced herself that “this time it’s different”.
“Looks like it’s not that different. Hopkins’ Larry Ball has some older estimates that are a good place to start: a 1% drop in inflation seems to cost you about a 1% drop in production relative to trend, which typically means a 3% drop in the unemployment rate.”
Jones concluded that if rich countries tried to reduce inflation by 6%, the unemployment rate would rise and a recession would ensue.
“The best way to cut that cost in half or more is to quickly remove the band-aid, as Powell’s speech today [Friday] came as a shock to seemingly naïve traders, it’s a good sign that he’s ready to be done with it, and a sign that the recession won’t be as bad as if he had taken the walk approach slow.”
While many commentators assume that the United States is not in recession, there may well be more macroeconomic turbulence ahead, as suggested by Jones. Beyond the energy crisis in Europe and the potential housing crisis in China, the US economy is in a technical recession – by some definitions.
After declining 1.6% in the first quarter, the US economy contracted 0.6% in the following quarter, Data via the United States Bureau of Economic Analysis.
It is a technical recession by some definitions, although recessions in the United States are officially announced by the National Bureau of Economic Research (NBER) and are not necessarily defined by revised GDP data.
The NBER website said that although most recessions consist of two or more consecutive quarters of decline, there are exceptions.
“In 2001, for example, the recession did not include two consecutive quarters of declining real GDP. During the recession, from the peak in December 2007 to the trough in June 2009, real GDP fell during the third and fourth quarters of 2008 and the first and second quarters of 2009.”
So, while the U.S. economy avoids a recession for now, there could be further macro headwinds as the Fed fights inflation and conditions evolve, which could lead to riskier behavior on stocks. markets.
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