Pow! Right in the ticker, Fed chair sends markets lower: This week in markets

Crypto markets fell at the end of the week in what appeared to be a reaction to Fed Chair Jerome Powell’s speech in Wyoming. 

Bitcoin was down 4.98% over the past seven days at the time of writing, according to CoinGecko, trading hands for $20,087. Meanwhile, ether shed 5.32% in the same period, trading below $1,500 at $1,492. Bitcoin fell below $20,00o on Saturday, while either slipped under $1,500.

Other notable losses include uniswap shedding more than 15% in the past week, while solana and avalanche both lost a little under 10%. Some tokens beat the trend to register gains over the past seven days, including EOS and polygon — up 8.3% and 5.2% respectively.

However, overall the market is trending downward as it flirts with diving below $1 trillion global market cap. The fall in crypto prices was broadly in line with traditional financial markets, as the Nasdaq dropped almost 4%, while the S&P 500 clocked its biggest daily decline in over 2 months, falling 3.37% on Friday. 

Fed stance spells trouble for crypto

The Block asked Garett Jones, associate professor of economics George Mason University, what the aggressive Fed rate hikes might mean for inflation, and in turn digital assets. According to Jones, for the most part crypto acts like a speculative asset when it comes to pricing, meaning its useful to think about it like a “super-risky stock.”

Typically stocks get hammered when the Fed decides to fight inflation, he said, and Wall Street has either forgotten how hard it has been for rich nations to fight 5% to 10% inflation, or simply convinced themselves that “this time is different.” 

“Looks like it’s not that much different. Larry Ball of Hopkins has older estimates that are a great place to start: 1% fall in inflation seems to cost you about a 1% fall in output relative to trend, which usually means a 3% rise in the unemployment rate.”

Jones concluded that, if rich nations are trying to bring inflation down by 6%, then the unemployment rate would rise and a recession would follow.

“The best way to cut that cost in half or more is by ripping off the Band-Aid quickly, so while Powell’s speech today [Friday] was a shock to apparently naive traders, it’s a good sign he’s willing to get this over with, and a sign the recession won’t be as bad as if he took the slow-walk approach.”

Technical Recession?

While many commentators are working on the assumption that the US isn’t in a recession, there may well be further macroeconomic turbulence ahead, as Jones suggested. Beyond the energy crisis in Europe and China’s potential property crisis, the US economy is in a technical recession — by some definitions. 

Following a decline of 1.6% in the first quarter, the US economy shrank by 0.6% in the next, per data via the US Bureau of Economic Analysis. 

This is a technical recession by some definitions, although recessions in the US are officially announced by the National Bureau of Economic Research (NBER) and not necessarily defined by revised GDP data. 

The NBER website says that, while most recessions do 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 decline in real GDP. In the recession from the peak in December 2007 to the trough in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first and second quarters of 2009.”

So, while the US economy avoids a recession for now, there may be further macroeconomic turbulence ahead as the Fed fights inflation and the picture develops – which may lead to more risk-off behavior in markets.

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