Shaky ground has lately become familiar territory for the U.S. economy, with the U.S personal consumption expenditure (PCE) inflation index escalating by a noticeable 3.5% in the past year alone, far exceeding the U.S. Federal Reserve’s target rate of 2%. Inherent in this brewing storm is the insurmountable fact that U.S. Treasuries have depreciated by a startling $1.5 trillion, primarily attributable to recent rate hikes. This has prompted a pertinent question amongst investors – whether assets such as Bitcoin and the broader stock market can weather heightened interest rates and a monetary policy dedicated to tempering economic growth.
The U.S. Treasury continues to beset the market with debt, posing a concerning probability that rates could ascend even further, inflating the losses for fixed-income investors. More so, an additional $8 trillion of government debt is slated to mature over the next year, adding fuel to the growing fire of financial instability.
Amid rising interest rates, the prices of existing bonds fall in a phenomenon coined as interest rate risk, impacting countries, banks, and anyone clutching fixed-income instruments. The wave of turbulence has also battered the Dow Jones Industrial Index, which fell by 6.6% in September alone.
As treasuries lose value, banks may find themselves short of the necessary funds to meet withdrawal requests, sliding closer to insolvency and requiring a safety line from institutions like the FDIC or larger banks.
The real concern is whether we can keep course without inflicting extensive damage, commented Daniel Porto, from Deaglo London. The Federal Reserve’s BTFP emergency loan program can provide some relief but doesn’t magically erase losses. Banks are increasingly purging their holdings to credit and hedge funds, adding rate-sensitive assets to these sectors. This trend might get worse if the debt ceiling is increased.
Monetary policy tightening that exacerbates disruptions in the financial system can bolster the case for assets like Bitcoin, especially amidst increasing inflation and a worsening Federal Reserve’s balance sheet profile. While it’s challenging to predict the timing and the ultimate outcome, it’s difficult to be pessimistic about Bitcoin under such circumstances.
Source: Cointelegraph
