July 21, 2024
Arthur Hayes Predicts Federal Reserve's Battle Against Inflation Will Boost Bitcoin and Risk Assets
Bitcoin News

Arthur Hayes Predicts Federal Reserve’s Battle Against Inflation Will Boost Bitcoin and Risk Assets

The Fed may be involuntarily boosting the money supply despite quantitative tightening.

Arthur Hayes, co-founder of BitMEX, thinks the Federal Reserve will fail in its fight against inflation, which would ultimately help “risk assets of finite supply,” like Bitcoin.

The essayist argued that the Fed is taking money out of one sector of the economy while infusing it into another in a blog post that was published on Wednesday.

Long-term price increases for assets like Bitcoin are likely as long as the Fed’s “quixotic” anti-inflation agenda is in place.

“Bitcoin has a finite supply, and therefore, as the denominator of fiat toilet paper grows, so will Bitcoin’s value in fiat currency terms,” Hayes wrote.

The former CEO thinks that, aside from major tech and cryptocurrencies, depositing their money at the Fed and generating a rate of around 6% will provide investors with a better return.

He continued by outlining the shortcomings of the Fed’s strategy.

The central bank is specifically compelled to pay out billions more to depositors each month by raising its Reverse Repo Program (RRP) and Interest on Reserve Balances (IORB), which offsets the effect that the Fed’s quantitative tightening (QT; selling bonds on the open market) has on the money supply.

“If the Fed believes that to kill inflation it must both raise interest rates and reduce the size of its balance sheet, then it is cutting its nose to spite its face,” Hayes wrote.

Paul Volcker, a former central bank chairman who is credited with suppressing inflation in the 1980s through hawkish monetary policy, had a different strategy than the central bank. In the 1980s, the Fed may have changed its policy rate, but it did not micromanage RRP and IORB rates to match it, as Hayes indicated.

“The only variable that changed from the Fed’s perspective was the size of its balance sheet,” stated Hayes.

Currently, the Fed uses QT to withdraw $80 billion from the market each month while pumping $22.53 billion into banks. Even if it still seems “restrictive,” Hayes calculated that the rising interest costs on U.S. government debt are injecting an additional $80 billion into the economy each month. He stated, “I think that $23 billion in net cash is pumped per month.

Hayes predicted that the Fed would eventually change its mind about QT as the U.S. Treasury ran out of purchasers for its debt and became eager to avert a catastrophic default. Despite this, the market hasn’t yet invested money in Bitcoin because it doesn’t seem to recognize this as imminent.

“We gotta go down to go up. I’m not going to fight the market, but just sit tight and accept my stimmies,” concluded Hayes.

Image: Freepik

Disclosure Statement: Miami Crypto does not take any external funding, or support to bring crypto news to the readers. We do not have any conflicts of interest while writing news stories on Miami Crypto.

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