By Michael Scott
The move by the Federal Reserve to deploy quantitative tightening in fighting inflation is yielding little gain. BitMEX co-founder Arthur Hayes equates the Fed’s move as raising the money supply involuntarily.
The BitMEX executive projects that the Federal Reserve would ultimately become disinterested in beating inflation. Such development would benefit the risk assets with a finite supply led by Bitcoin.
In a Wednesday, August 23 publication, Hayes alleged that the Federal Reserve is drawing money from one segment and injecting the same amount into another economic sector. He decried the quixotic strategy the Federal Reserve deployed under Jerome Powell’s reign in combating inflation. The executive argues that retaining such strategies would surrender popularity and growth to Bitcoin in the long run.
BitMEX Former Chief Challenges Fed to Consider 1980s Strategies
Hayes indicated in the blog post that Bitcoin, alongside other tokens with a finite supply, would have increasing value as the denominator in the fiat currency grows. Besides investing in big tech and crypto projects, the former BitMEX chief executive believes that investors would earn rewarding returns from storing their money at the Fed to make yield he projects to hit 6%.
Hayes laments the Fed’s move to rely on flawed tactics whose result appears elusive for the economy. In particular, he indicates that the sustained hawkish stance to raise the Internet on reserve balances (IORB) alongside the Reverse Repo Program (RRP) works to the contrary. Raising IORB and RRP compels the central bank to fork out billions of dollars monthly to the depositors. The move counters the effect of the Fed’s strategy targeted at containing the money supply through quantitative tightening. He pokes holes in the decision by Powell to stick to quantitative tightening by selling more bonds on the open market.
Hayes labels the Fed’s belief that subduing inflation is realizable by raising the interest rates while reducing the balance sheet size. He equates that to cutting the nose to offend the face.
Hayes considers that Powell should borrow a leaf from the approach deployed by Paul Volcker, who successfully crushed the 1980s inflation. The former chair deployed hawkish monetary policy by adjusting the rate. However, Hayes observes that the Fed did not micromanage RRP and IORB rates to match the policy rate adjustments.
Fed Fight Against Inflation Leaving $22 Billion Net Injection
Hayes observes that the balance sheet size was the only variable with notable changes following the Fed’s strategies. He argues that the Fed drains $80 billion monthly from the market via quantitative tightening, injecting $22.53 billion into the depositors.
While the Fed’s move is restrictive, the BitMEX co-founder argues that the US government debt suffers rising interest that injects another $80 billion. Also, the Fed’s strategy leaves another $23 billion net injection into the economy monthly.
Will Fed Reconsider Current Strategy to Combat Inflation?
Hayes anticipates that the Fed would soon reverse the course on advancing quantitative tightening. The Treasury becomes overwhelmed by alternative debt buyers and concerned with how to avoid cataclysmic default.
Hayes indicates that the market is yet to acknowledge the need to change as imminent. The market is yet to move the capital into Bitcoin. The former BitMEX chief challenges the Fed to review the strategy and reconsider the most viable mechanism to battle inflation without hurting the economy in the long run.