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Powell's Jackson Hole Speech Boosts Bitcoin, But Not in the Short Term

The U.S. Federal Reserve chair Jerome Powell gave the much anticipated Jackson Hole speech on August 27th. As strategists expected, Powell addressed inflation and the Fed’s intent to adjust its monetary policy. 

Theoretically, the speech should have buoyed the sentiment around Bitcoin and gold. The Fed said it would allow inflation to rise, which typically benefits traditional safe-haven assets like gold. 

More investors have also started to increasingly consider Bitcoin as digital gold and a hedge against inflation. Based on the rising adoption of Bitcoin and the safe-haven characteristics of gold, analysts expected the speech to cause Bitcoin and gold to surge.

Why the Fed’s Speech Doesn’t Necessarily Benefit Bitcoin in the Near Term

On Thursday, Bitcoin experienced a quick surge to $11,550 before sharply dropping to $11,170 on Bitstamp. Since then, Bitcoin has recovered to the $11,400s, reversing the losses incurred during the drop.

While Powell’s speech has led many to a bearish outlook on the dollar’s long-term inflation rate, the symposium seemed to have no apparent lasting effect on the Bitcoin price. This may be due to the Fed’s announcement that the inflation target of 2% would be maintained.

Instead of straight out raising the inflation target, during his speech, Powell introduced the term ‘average inflation’. Rather than raising the inflation rate above 2%, the Fed would allow inflation rates to rise higher temporarily but ultimately maintain a 2% average inflation rate. Powell said:

“In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average. Thus, our approach could be viewed as a flexible form of average inflation targeting.”

However, there is skepticism from the public on the ambiguity of the Fed’s framework with regards to the inflation target. Holger Zschaepitz, a market analyst at Welt, said the speech did not elaborate on how the Fed plans to achieve that target. 

“Fed's new plan to lift inflation faces skepticism that new approach will achieve goals. Powell’s new framework doesn’t explain how they’ll get there. Fed has missed 2% inflation objective since 2012.”

Straightforward Message Suggests the Market Priced it in

Powell’s message was largely in line with what strategists had anticipated throughout the build-up. Prior to the speech, Evercore ISI vice chairman Krishna Guha said his team expected the Fed to seek a “moderate inflation overshoot” to prevent prolonged low-growth periods from low inflation.

The Fed chair addressed exactly that; he emphasized that the undershoot of inflation was a concern and a forward-thinking policy would be necessary to offset slowing economic growth. 

"The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern. Many find it counterintuitive that the Fed would want to push up inflation. After all, low and stable inflation is essential for a well-functioning economy.”

The lackluster response from Bitcoin indicates that the market expected a minor inflation overshoot, and Powell did not go any further than that. As such, in the short term, it is unlikely to significantly affect Bitcoin.

written by

Joseph Young is a financial analyst based in South Korea. He has covered Bitcoin and the crypto market since 2013. He regularly contributes to the BTC Times, Forbes, and Cointelegraph.