Federal Reserve Chair: Market Ready for Higher Rates, Bitcoin Volatility Does Not Affect Macro Economy

The Federal Reserve Chairman revealed several key points during the 6/22 hearing, including the stance of continuing to raise interest rates until inflation cools down. Regarding cryptocurrencies, he mentioned that the Federal Reserve is still closely monitoring but not concerned, emphasizing that the volatility of Bitcoin will not affect the macroeconomy. However, he stressed that whether stablecoins or cryptocurrencies, they both require better regulatory frameworks.

Accepting the Possibility of Economic Recession

According to the testimony on 6/22 hearing, Federal Reserve Chairman Jerome Powell stated that the Fed must continue to raise interest rates to combat inflation, even if it may mean higher unemployment rates and the potential for an economic recession.

Navigating a soft landing after an economic overexpansion is extremely challenging and could indeed lead to an economic recession. We are not intentionally seeking nor do we believe the Fed needs to cause an economic recession, as that is not our desired outcome. However, we do believe that restoring price stability is imperative, and this direction is entirely for the benefit of the labor market, just as we consider in all our actions.

The current benchmark interest rate is around 1.5% - 1.75%, but with expectations of the Fed officials intensifying interest rate hikes, the benchmark interest rate could reach 3.25% - 3.5% by the end of the year. Powell pointed out that although the economic and financial market conditions have reflected the effects of rate hikes, continued efforts to raise interest rates are necessary to curb inflation.

Powell mentioned that factors such as the Russia-Ukraine conflict, surging commodity prices, supply chain issues, among others, make it challenging to achieve the Fed's expected goal of "2% inflation, strong job market." He believes that monetary tightening is an effective tool against inflation, and the market is prepared to handle higher interest rates.

Cryptocurrency Regulatory Framework

For Powell, the cryptocurrency space seems to be the simplest topic to address during the hearing, requiring emphasis on the importance of cryptocurrency regulation and advocating for the creation of a new regulatory framework, yet progress in this area has been slow.

In this instance, Powell stated that while the Fed believes that the volatility in Bitcoin and the cryptocurrency market will not lead to macroeconomic impacts, the crypto space is still in a very early stage of innovation and indeed requires a better regulatory framework, with the central bank closely monitoring it.

SEC Misstep, CFTC Gain?

Previously reported, Coinbase CEO Brian Armstrong clarified statements in SEC documents in early May:

As custodial assets may be considered bankruptcy assets, in the event of a bankruptcy, the crypto assets custodied on behalf of users may be affected by the bankruptcy proceedings, and such users would become unsecured creditors of ours. Coinbase has limited insurance coverage for certain events that may not cover such losses.

This is due to the SEC's suggestion that crypto custodian institutions must include custodial assets on the institution's balance sheet, hence Coinbase's disclosures in the Form 10-Q report submitted to the SEC.

Powell also highlighted the SEC's move:

Custodial assets have always been excluded from the balance sheet, and the SEC has made a distinct decision, which we now have to reassess. The SEC is monitoring this issue and discussing it with other banking regulatory agencies.