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Federal Reserve Could Taper ‘Soon’ as Officials See Interest Rate Hike Next Year

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The U.S. Federal Reserve said it will keep interest rates near 0% and continue to purchase bonds at the same $120 billion-a-month pace it has been doing, but the market now has clarity on how the central bank will start to unwind, or taper, its stimulus program.

The Federal Open Market Committee (FOMC), the central bank’s monetary policy panel, said Wednesday in a statement that tapering the bank’s bond purchases “could be warranted soon,” because the economy has made progress toward its goal of maximum employment. The panel said it will keep the target rate for federal funds in a range of 0% to 0.25%.

The decision is being closely watched by bitcoin traders, many of whom say that the largest cryptocurrency can serve as a hedge against dollar debasement in the face of an ultra-loose monetary policy.

Fed Chairman Jerome Powell told reporters during a press conference that the tapering process could end by the “middle of next year” if the economy continues to make progress toward maximum employment.

“Vaccinations and unprecedented fiscal policy actions are also providing strong support to the recovery indicators of economic activity,” Powell said.

“We are seeing upward pressure on prices,” he added, citing the impact of “supply bottlenecks”

Bitcoin’s price was little changed after the announcement, trading at around $43,200 – possibly a signal that traders remain unconvinced the Fed will turn hawkish anytime soon.

Many cryptocurrency investors speculate that “quantitative easing,” or QE, could weaken the dollar, pushing up the value of bitcoin, which has a capped supply. Bitcoin is also still seen on Wall Street as a speculative asset, and the bet is that more investors will be forced to seek such investments as QE – the practice of printing money to stimulate markets – suppresses returns in traditional bond markets.

Fed officials also raised their inflation expectations and moved the expected timeline for raising interest rates to 2022 from 2023, based on the “Summary of Economic Projections” (SEP), which was also released Wednesday. In the case that bitcoin is treated as a hedge against inflation because of its capped supply, this could be a positive note for crypto investors.

According to the summary of economic projections:

  • Federal officials’ median expectation for growth this year in gross domestic product dropped to 5.9% from the 7% expected in June, when they last disclosed projections.

  • The unemployment rate is seen at 4.8% this year, which is higher than what was projected in June.

  • Prices for personal consumption expenditures, the Fed’s preferred inflation measure, could rise 4.2% this year, compared with a June projection of 3.4%.

  • The median projection is now for two interest rate increases by the end of 2022, and three officials now see two rate hikes next year. At the June meeting, only seven Fed officials were expecting a liftoff that soon. (Not all Fed officials who plot dots are FOMC voting members, which means that the dots are a projection, not a forecast.)

DISCLOSURE

Nate DiCamillo is a business reporter at CoinDesk with a focus on banking and economics.

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