Fed Continues to Buoy the Market


  • Equity markets rallied upon stronger economic data and low benchmark rates.
  • Fed has not decided on yield curve control yet. 
  • A low-interest environment supports the price of real assets, including Bitcoin.

Equity markets rallied recently as the U.S. non-Farm payroll rose by 4.8 million in June, a leap from the expected increase of 2.9 million. The job market witnessed a substantial growth from 2.7 million in May. The growth in June easily sets the largest single-month growth record in U.S. history. The Conference Board’s consumer confidence index in June shot up to 98.1 from 85.9 in May, significantly exceeded the expectation of 91.

Source: BLS, CNBC

These figures imply that the economy is in the process of recovery. Improvement in the employment figures boosts consumer sentiments. Despite fears of a potential coronavirus resurgence, risk assets pushed against adverse speculations and rallied, as the release of the Fed’s latest minutes buoyed market sentiment. 

On July 1, the Fed published minutes of the meeting held on June 9, 2020. The Fed maintains that the economy needs more support despite recovered market sentiment and improved financial conditions. 

According to the Fed’s rate projections, the US benchmark rate will stay in the current range of 0-0.25% until at least 2022, which means there will not be any rate hike before 2023. 

The US rate futures also suggests that the market consensus foresees a 0-0.25% interest rate by March 2021. 

Source: CME Group

The Fed officials are still debating the adoption of more aggressive yield caps or yield targets (YCT) policies to regulate the long term interest rate. This strategy was adopted in dire situations, including during and after World War II, and is currently deployed by the Bank of Japan and the Reserve Bank of Australia. The Fed has not decided to commit to YCT yet due to potential risk associated, but will provide more “outcome-based forward guidance”. 

Lower interest rates lead to higher prices of real assets, including Bitcoin, which is dubbed “digital gold”. Bitcoin shares many qualities of the precious metal – durability, fungibility, divisibility, and, most importantly, scarcity. Yet, Bitcoin has a key advantage over gold, namely its immutability. In a recent gold counterfeiting scandal, 83 tons of counterfeit gold were used as collateral for loans amounting to USD 2.3 billion. This is not the first time fake gold has been used as collateral for loans. In 2016, gold bars with tungsten, a common material for counterfeits, at their centers, backing USD 2.5 billion of loans. 

The pervasiveness of counterfeits raises questions about the practicality and reliability of gold as a reserve asset. Conversely, ever since its inception, cases of fake Bitcoin have never occurred owing to the much superior authentication technology of blockchain.