The cryptocurrency market crashed as the Federal Reserve Chair, Jerome Powell, warned of possible tight conditions in the monetary market in the future. He said that during the central bank meeting in Jackson Hole on August 26th. Traditional financial markets have also been affected, showing that there is still a very strong correlation between them and digital currencies. Bitcoin has fallen very close to $20,000.
Bitcoin Falls as Central Banks Warn Tight Conditions Ahead
Bitcoin and cryptocurrencies have fallen in recent hours as Jerome Powell warned about possible tightening policies in the near future. This is despite the most recent data on inflation where the CPI remained stable in July compared to June’s results. These comments made by Jerome Powell during the central bank’s annual Jackson Hole meeting have severely affected risk assets, including stocks and digital assets.
During the meeting, he explained that there will be slower growth and some pain to households and businesses. This is the price of bringing inflation down, after a year in which the CPI got very close to 10%. This could mean that interest rates could keep growing in 2022 as the market recovers from the most recent inflation spike.
About it, Jerome Powell said:
“While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Traditional financial markets were heavily affected. For example, the Dow Jones Industrial Average lost more than 500 points after Powell’s remarks. This has also been very negative for Bitcoin and other digital currencies. According to data shared by CoinGecko, Bitcoin fell to $20,115 at the time of writing this article, with a market valuation of $384.85 billion. Meanwhile, the whole crypto market capitalization hit $1 trillion after falling by over 6.7%.
Other virtual currencies have also been affected. We are talking about Ethereum (ETH), Binance Coin (BNB), XRP, Cardano (ADA), Solana (SOL), and Dogecoin (DOGE), among others. Ethereum, for example, fell by almost 11% in the last 24 hours. Solana registered a price decrease of 8.7% and Cardano fell by 7.7%.
This recent price action can be explained due to how the FED sees the trend of inflation in the near future. A more hawkish stance on inflation means that there could possibly be higher interest rates in order to stop prices from moving even higher. At the same time, the most recent comments by Jerome Powell show that there is still work ahead that would require additional measures to tighten financial markets even further.
When interest rates are higher, investors move from risk assets such as stocks and cryptocurrencies to more stable solutions such as bonds. Therefore, we could see the crypto market move lower even further during the next weeks if central banks comment about the future of the market or how they are planning to stop inflation.