The US Federal Reserve (Fed) announced on Sunday March 15, that it is dropping the benchmark interest rate to zero. The Fed also launched a new round of quantitative easing program that involves buying $700 billion worth of assets in a bid to stabilize the financial market. $500 billion of these funds will be channelled to Treasurys while $200 billion will be used to buy agency-backed mortgage securities beginning Monday March 16.
Rate cuts and quantitative easing to help stabilize the economy
This intervention by the US central bank aims to address the disruption in the financial markets caused by the coronavirus epidemic. The Fed made this announcement citing the need to shelter the economy from the adverse effects of the virus.
“the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,”
The rates cut and injection of liquidity into the economy is aimed at bringing stability to the banking system. According to the Fed, this will enable an efficient flow of credit to American households and businesses to help them cope with the impact of the coronavirus pandemic.
The biggest banks in America have affirmed their support for this move by stating that they will stop buying back their own stocks. This will ensure the effective implementation of the Fed’s monetary policy by prioritising the customer’s liquidity needs.
Fed’s move to print more money plays right into Bitcoin halving
The US Fed’s decision to cut rates and act as the ‘lender of last resort’ for the banking industry weeks before Bitcoin halving is a major boost for the cryptocurrency. According to observers in the crypto community, the move is an indication of the Fed running out of options and signals desperation and panic to the market.
Morgan Creek’s Anthony Pompliano, expressed disbelief at the news by relating to the deflationary nature of bitcoin in comparison to the Fed’s unlimited liquidity.
The decision is reminiscent of banks bailout during the 2008 financial crisis that was the precursor to Bitcoin’s creation. The cryptocurrency functions as sound money with a fixed supply and low inflation rates that do not necessitate intervention from central authorities.
Ironically, the new measures instituted by the Fed will lead to higher inflation whereas the upcoming Bitcoin Halving in May will reduce the cryptocurrency’s supply by 50%. This will effectively slash bitcoin’s inflation by half. This is an indication of bitcoin’s superiority over the US Dollar and the supremacy of decentralization in finance.
