Low inflation or bust: Analysts say the Fed has no choice but to continue raising rates

As economic conditions continue to worsen, financial experts worldwide are increasingly placing the blame at the feet of the Federal Reserve after the central bank was slow to respond to rising inflation early on.

Financial markets are currently experiencing their worst stretch of losses in recent history and it doesn’t appear that there is any relief in sight as May 24 saw the tech-heavy Nasdaq fall another 2%, while Snap, a popular social media company, shed 43.1% of its market cap in trading on May 23. 

This past couple of months have been absolutely brutal for the markets… 8 consecutive weeks of red candles in the #SPX, #NASDAQ and #BTC… no significant bounces pic.twitter.com/hgU2VwIoxh

— Crypto Phoenix (@CryptoPheonix1) May 24, 2022

Much of the recent turmoil again comes back to the Fed, which has embarked on a mission to raise interest rates in an attempt to get inflation under control, financial markets be damned. 

Here’s what several analysts are saying about how this process could play out and what it means for the price of Bitcoin (BTC) moving forward. 

Will the Fed tighten until the markets break?

Unfortunately, for investors looking for short-term relief, economist Alex Krüger thinks that “The Fed will not stop tightening unless markets break (far from that) or inflation drops considerably and for many months.”

One of the main issues affecting the psyche of traders is the fact that the Fed has yet to outline what inflation would need to look like for them to take their foot off the rate hike gas pedal. Instead, it simply reiterates its goal “to see clear and convincing evidence inflation is coming down towards its 2% target.”

According to Krüger, the Fed will “need to see the year-over-year inflation drop 0.25% - 0.33% on average every month until September” if it is to meet its goal of bringing down inflation to the 4.3% - 3.7% range by the end of the year.

Should the Fed fail to meet its PCE inflation target by September, Krüger warned about the possibility that the Fed could initiate “more hikes than what’s priced in” and could also begin exploring the sale of mortgage-backed securities as part of a quantitative tightening campaign.

Krüger said,

“Then markets would start shifting to a new equilibrium and dump hard.”

A setup for double-digit sustained inflation

The Fed’s responsibility for the current market conditions was also touched on by billionaire investor and hedge fund manager Bill Ackman, who suggested that “the only way to stop today’s raging inflation is with aggressive monetary tightening or with a collapse in the economy.

In Ackman’s opinion, the Fed’s slow response to inflation has significantly damaged its reputation while its current policy and guidance “are setting us up for double-digit sustained inflation that can only be forestalled by a market collapse or a massive increase in rates.

Due to these factors, demand for exposure to stocks has been muted in 2022 a fact evidenced by the recent decline in stock prices and especially in the tech sector. For example, the tech-heavy Nasdaq index is now down 26% on the year. 

With the cryptocurrency sector being highly tech-focused, it's not surprising that weaknesses in the tech sector has translated to weakness in the crypto market, a trend that could persist until some form of resolution to high inflation.

Related: Bitcoin price returns to weekly lows under $29K as Nasdaq leads fresh US stocks dive

How could Bitcoin fare going in 2023?

According to Krüger, the “base case scenario for upcoming price trajectory is a summer range that starts with a rally followed by a drop back to the lows.”

Kruger said,

“For BTC, that rally would take price to the start of the Luna dump ($34,000 to $35,500).”

Further insight into what price level to keep an eye on for a good entry point moving forward was offered by crypto trader and pseudonymous Twitter user ‘Rekt Capital’, who posted the following chart of Bitcoin relative to its 200-day moving average.

Rekt Capital said,

“Historically, the 200-MA tends to offer fantastic opportunities with outsized ROI for long-term BTC investors (green circles). Should BTC indeed reach the 200-MA support… It would be wise to pay attention.”

The overall cryptocurrency market cap now stands at $1.258 trillion and Bitcoin’s dominance rate is 44.5%.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.