US President Joe Biden picked Jerome Powell to lead the Federal Reserve for the second term on Monday. Powell’s renomination came as a relief to Wall Street, seeing as he helped rescue the US stock market from the chaos that ensued after the onset of the COVID-19 pandemic. While Powell’s leadership helped prevent a protracted recession, his second term comes with new challenges.
With the rising inflation, the Fed may need to increase interest rates, which are currently near zero. These low rates, increasing consumer savings, stimulus checks from the government, and concerns about rising inflation have, reportedly, seen Americans increasingly embrace high-risk investments, such as cryptos and unprofitable tech companies.
For instance, meme coins like Dogecoin (DOGE) and Shiba Inu (SHIB) rose rapidly as speculative traders tried to increase their wealth. The tokens currently have market caps of $28 billion and $21 billion, respectively. Bitcoin (BTC), the leading crypto by market capitalization, also surged significantly after positioning itself as an inflation hedge.
With such developments coming under Powell’s watch, Mike Bailey, the Director of Research at FBB Capital Partners, said,
For die-hard crypto bulls, another Powell term may provide some confirmation bias, since these investors often view crypto as a hedge for loose Fed policy.
While the above factors helped the crypto space thrive, the Fed can easily trigger a bloodbath in the entire market. The Federal Reserve is set to increase interest rates in June next year. In so doing, the demand for the dollar would rise, driving investors to inject their money in dollar-related investments, such as traditional stocks. This change of pace would result in the crypto market crashing.
Although the Fed is slated to raise interest rates in June, the worsening inflation might push the central bank to shorten this timeline. Such a move would take a toll on both the stock and crypto markets, but some experts believe Powell’s clear communication with Wall Street and his cautious approach might help dampen the impact.
For instance, Truist’s Keith Lerner claims Powell is focused on maximum employment and will take a guarded approach to ensure he doesn’t raise rates too fast.
However, other experts feel Powell is downplaying the threat of inflation by blaming it on supply chain issues instead of acknowledging that it is a lasting force.
The moment of truth for investors
According to Douglas Boneparth, the President of Wealth Management firm Bone Fide Wealth, the Fed rolling back monetary support will help retail investors determine whether their portfolios are strong or not.
Boneparth added that,
When you take one of the crutches away to see if the economy can walk on its own, investors are going to find out just how durable their portfolios are.
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