The Fed’s Rate Hike Could Cost Jobs As Bitcoin Continues Selloff

The US Federal Reserve has been essentially seeking to tackle the unemployment dilemma for the past 20 months. This should come as no surprise since the central bank’s top goal is maximum employment, followed by stable prices and moderate long-term interest rates, as it has claimed.

However, as investors expect to see interest rate hikes sooner than previously anticipated, analysts are voicing concerns about the implications of such a move. For one, a dovish rate hike could have an adverse impact on jobs and further increase the unemployment rate. 

“A Recession Hurts Vulnerable Workers the Most”

The Fed has been holding interest rates near zero and purchasing bonds to support the economic recovery after it was badly hurt by Covid. With inflation soaring, so much so that Twitter and Square CEO Jack Dorsey warned hyperinflation is “happening,” even some supporters of the Fed’s jobs start to worry that the central bank might be doing more harm than good.

All of this has prompted Jason Furman, prominent Democratic economist and former Council of Economic Advisers chair, to urge for a quick Fed pivot towards a tighter policy. He warned Wednesday that the Fed does not share the same view as others regarding the current economic status. 

Furman added that the central bank would end up further hurting the economy if it shifts toward a more dramatic policy or proceeds to increase interest rates instantly. “A hot economy helps vulnerable workers the most,” he said, adding:

“But a recession hurts vulnerable workers the most…Slowing inflation a little now could help obviate the need for even more drastic and painful steps in the future — and reduce the chances of a future recession with the millions of jobs that could be lost.”

The Fed has signaled it will taper bond purchases, which it will start doing by late November. In the first step toward unwinding the $120 billion per month stimulus program, the central bank will cut monthly treasury purchases by $10 billion and mortgage-backed securities by $5 billion. 

However, Furman, who is now a Harvard University professor, calls on the Fed to expedite terminating its bond-buying. He also asked the central bank to set a “default” plan and begin raising interest rates starting the first half of next year.

Earlier this month, Jerome Powell, the Fed Chairman, assured investors that he has no intention of increasing interest rates in the short term. He insisted that interest rates will remain near-zero levels until inflation averages 2% and employment reaches an optimal level. 

Biden’s Fed Pick Decision to Come Before Thanksgiving 

As markets were reopening following the pandemic, prices started to rise. Initially, officials framed this as “transitory inflation,” claiming that it was a byproduct of reopening the economy. However, inflation proved to be more persistent, even convincing Powell that it might not be as transitory as they first thought. 

This also hurt President Joe Biden’s popularity ahead of the upcoming midterm elections, forcing him to consider whether to reappoint Powell or replace him with Governor Lael Brainard. The White House has said President Biden will likely make a decision before Thanksgiving.

Meanwhile, some analysts believe that dynamics that have partially held down prices in recent years like discounts have inverted, further deteriorating the economic outlook. Adobe Inc’s monthly index of online prices, for instance, recorded its 17th consecutive increase in October.

Taylor Schreiner, director of Adobe Digital Insights, pointed out that even less discounting might come in the holiday season. “For consumers, the place they used to expect increasing value is no longer headed in that direction,” he said.

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Unemployment Data Is “Cloudy Right Now”

In April 2020, the US unemployment rate increased by 10.3% initially and then jumped to 14.7% — roughly a 90-year high. This alone can be enough to indicate that the economy needs help, with an increase in interest rates a tool that could help, according to claims by economist Stephen Roach. 

In an interview with CNBC, Roach argued that the only way to contain inflation is immediate rate hikes. “They need to raise rates first and worry about the balance sheet later,” said Roach. “They need to use the most impactful tool they have, not the least impactful tool, which is the balance sheet.”

Other analysts, however, seem to disagree over when the Fed should proceed with its first interest rate increases. Even those Fed officials that feel the need to raise interest rates have placed an upper cap of 2x, which totals half a percentage point over the next year. 

Nevertheless, some lawmakers claim increasing rates prematurely, which could potentially slow job growth, would be an even bigger mistake, particularly since there is no clear data right now. Mary Daly, San Francisco Federal Reserve bank president, said:

“We’ve got 4 million fewer jobs than we did have and if you take into account where we would have been without COVID it’s more like 6 million, and that’s not what I would consider full employment. The data are cloudy right now, and if we react to cloudy data we could end up making a mistake that’s very challenging to unwind.”

Meanwhile, the crypto market has been recording bloody days amid concerns over the infrastructure bill. Bitcoin, which has recently hit a new all-time high of around $69,000, has shed around 15%, dropping to $59,000. Ethereum, similarly, has lost around 15%.

However, CRO, Crypto.com’s native token, has been on a hit since the crypto exchange purchased the naming rights for the Staples Center. The coin is up by more than 5% over the last 24 hours, and by around 50% over the past week.

When do you think the Fed should increase interest rates? Let us know in the comments below.