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US rate rise and Bitcoin

16 February 2018

Is a US rate rise inevitable next month?

A rate rise from the US Federal Reserve (Fed) is a near certainty in March and is priced into market expectations.  The Fed has raised rates five times since 2015 and is expected to raise rates three more times this year.  They have carefully managed expectations so that each time the rate rise has been priced in and there has been virtually no market reaction.  In the last two weeks there was speculation that higher wages and Trump tax cuts and spending would stimulate an economy that was already doing well and that inflation and interest rates would rise faster than previously expected.  The latest US inflation data that came out on Wednesday was stronger than expected which will have done nothing to diminish the probability of a rate rise.  The new chairman, Jerome Powell confirmed that he will look to continue the policies of his predecessors.  Therefore, we should continue to expect rates to rise this year starting in March. 

So what could cause the Fed to rethink its policy to answer the question more directly? This is not our base case but if the sell-off we saw in the last two weeks was to resume to such an extent that it threatened economic growth then we could see a deferral of planned rate rise.  Consumer confidence often lags stock market moves.  Less consumer spending would reduce inflationary pressures and would thus remove the incentive for the Fed to move. 

Many people have talked about a central bank put option underpinning the equity market in that any fall in equity markets would be countered by central bank action to prop up the market. Last week when markets were falling it was said that the put option was dead. Central bankers on both sides of the Atlantic appear to be happy to see some of the steam come out of the market and view the falls in markets as a healthy correction.  If the market fell abruptly and by much more than we saw last week this put could come back again.  For now, we believe that the US economy will be strong enough to sustain rate rises and higher equity markets. 

Is it the end for Bitcoin?

Bitcoin and other cryptocurrencies have had a rough ride after a spectacular price rise in 2017.  Bitcoin went up nearly twenty times until December 2017 then halved in a few weeks.  I am sceptical about these so-called currencies.  When I talk to Bitcoin fans, they say it is the currency of the future as it is not subject to central bank manipulation and there is limited supply.  A currency that moves as much as this makes it hard to price goods in.  It is untraceable so is attractive for money launderers to use but for legitimate businesses it is not practical.  It may not be subject to central banks who can print money debasing their currency but nor is there any way to value it.  Normal currencies are attached to countries with balance of payments and interest rates, cryptocurrencies are just driven by supply and demand.  While supply in Bitcoin is limited, the supply of cryptocurrency is not.  When I looked into it six months ago there were over seven hundred, today Wikipedia tells me there are over thirteen hundred.  Who knows how many of these are genuine schemes or how many will survive.

Ecologically it may be a problem.  Bitcoin can be created by adding computer power to the net.  This takes power to run the computers and to keep them cool.  As a result, these computers are concentrated in regions where power is cheap such as Iceland where the power used is said to equal the total consumption of the country as a whole.  This massive use of power for no real productive purpose seems wrong to me. 

With cryptocurrencies often being used for illegal activity and as a threat to conventional settlement methods that can be traced they are likely to be clamped down on by authorities.  Some private companies are already clamping down with Visa cancelling cards linked to cryptocurrencies.   I may be old fashioned but I have no metrics as to how to value Bitcoin and have not seen any that make sense to me.  It may just be a Ponzi scheme which ends up valueless.  Is it the end of Bitcoin? I was never convinced it was an investment in the first place but I suspect it will be around for some time to come, however whether this will be at a higher or lower price is guesswork.





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