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Inflation and the Fed Are Keeping the Crypto Market in Limbo

Inflation and the Fed Are Keeping the Crypto Market in Limbo
By Vin Narayanan
Date April 14, 2023

Crypto Market Musings

It feels like the crypto markets are warming up. As I write this, bitcoin is trading above $30,000. Ethereum is trading around $2,000. Even Solana has managed to make big gains. It’s up almost 20% over the last seven days.

Most of Ethereum’s gains are being driven by this week’s successful Shanghai update. The update, which was completed Wednesday, allows people who have staked ETH to withdraw their stakes and claim any gains or rewards. The hope is now that staked ETH can be withdrawn, more people will participate in the Ethereum ecosystem. Early returns suggest the network is holding up well. So now we have to wait and see whether adoption increases as expected.

But until we get a better handle on what’s happening with inflation, interest rates, recessionary concerns, and potential regulatory actions, it’s hard to determine whether this is a temporary thaw or the beginning of a major leg up. 

What Vin Is Thinking About

The Federal Reserve is in a bind of its own making. And it has the potential to wreck the economy this year. 

Inflation rates are coming down. But they’re not coming down quickly enough. In March, the Consumer Price Index increased by 5%. That’s the lowest inflation rate since June 2021. And compared to February’s 6% inflation rate, March’s inflation data looks downright rosy. But if you dig beneath the surface (as we did last year with shelter inflation before the mainstream media was reporting it), you’ll discover a myriad of problems. Prices were soaring last March. So a 5% increase from last March means prices are up a lot. More importantly, core inflation — which excludes food and gas prices because they’re extremely volatile — was up 5.5% compared to last year. That means core inflation is outpacing inflation. And it’s going to take a lot more than hope and a slowing economy to bring inflation down to its target level of 2%.

Ideally, the Fed would continue hiking rates until it was certain that inflation was not only headed in the right direction, but also falling at a meaningful rate. But the Fed can’t do that because of the banking crisis.

Banks are struggling in part because they did a terrible job of managing the Fed’s rate hikes to fight inflation. And now the Fed staff believes the banking crisis will trigger a “mild” recession.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” read the minutes from the Fed’s March meeting.

I believe if the Fed hikes rates at the pace it needs to in order to get inflation under control, the Fed funds target range will be closer to 6% instead of the current 4.75% to 5% range. But hiking rates that high could worsen the banking crisis and deepen the recession. So the Fed won’t do that. Instead, the Fed will likely continue to adopt smaller rate hikes that look good, but amount to just wishing the problem will go away on its own.

Until inflation is fully under control, it’s hard to envision this crypto market thaw turning into the beginning of a new bull market. The next few months will reveal much about where the market is headed next.

And Finally…

I grew up playing Super Mario Bros. It was an addictive video game. I played it so often that I could beat the game without using cheat codes. But as much as I loved Super Mario Bros., it had thin characters and no plot. The joy in playing Super Mario Bros. came from gameplay and catchy music, not storytelling.

So imagine my surprise when I discovered “The Super Mario Bros. Movie” killed it at the box office. It did $204.6 million domestically and $377 million globally at the box office in its opening weekend. Part of me wants to see how they took a video game with no depth and turned it into a story. Part of me shudders at the thought of Super Mario Bros. becoming a movie. I haven’t decided whether I’m going to watch it yet. Feel free to let me know what you think I should do on Twitter (@vinistic).

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