A new study by economists at the Chicago Federal Reserve Bank suggests that the US central bank has raised interest rates enough to bring inflation to its 2% target without causing a recession, indicating that risky assets, including cryptocurrencies, are moving towards a “goldilocks” or sustainable border.
No Need for Further Rate Hikes According to the VAR Model
In the September issue of the Chicago Fed Letter, Stefania D’Amico and Thomas King stated that vector autoregression (VAR) models show that the 500 basis point interest rate increase implemented since March 2022 has had a significant impact on output and may not require further rate hikes to control prices.
Market experts and analysts consider the current tightening cycle to be partly related to the cryptocurrency market crash last year. The research by D’Amico and King indicates that the end of the challenging period is approaching for risky assets such as cryptocurrencies, as it shows that the Fed is likely to stop further interest rate hikes.
In their overall assessment for the research, D’Amico and King noted, “Although most of the effects on production and inflation have already occurred, we expect the current monetary policy tightening to exert further downward pressure of approximately 3 percentage points on real gross domestic product (GDP) and 2.5 percentage points on the Consumer Price Index (CPI) level in the coming quarters. As real GDP growth remains positive throughout the projection period, the decrease in inflation occurs without a recession.”
Moving Towards the Goldilocks Zone in the Crypto Market
According to the model, the headline consumer price index will fall below 2.3%, which economists consider to be equal to a 2% inflation rate measured by the Personal Consumption Expenditures (PCE) price index. The Fed has long argued that this level is consistent with its mandate of achieving maximum employment and price stability. However, D’Amico and King added that the model did not signal a short-term interest rate cut or direct liquidity expansion.
The combination of falling inflation and a relatively resilient economy indicates progress towards the goldilocks zone, which is an ideal situation for taking risks in the cryptocurrency market and global financial markets. Since the Fed started raising interest rates, global markets and the cryptocurrency market have been under pressure due to concerns that tightening measures would disrupt the global economy and lead to a new economic collapse.
