Is the market too bullish on bitcoin? Deflationary recession looms
More and more analysts are worried that the Federal Reserve overestimated inflation and then reacted too aggressively. “We are now seeing the first evidence suggesting that deflation is a possible scenario, especially since we believe the Federal Reserve is basing itself on old data,” Wright’s Research said. Among other things, the inverted yield curve and the loan volume suggest that a recession is still a realistic scenario.
While investors are increasingly optimistic about bitcoin and other risk assets due to the price increases in 2023, we may have to worry.
Is the interest rate too high?
We saw a gigantic spike in inflation in 2022, but the Federal Reserve responded decisively with aggressive interest rate hikes. In the space of 15 months, interest rates shot up from 0.25 to the current 5.25 percent. For next Wednesday, the market expects another rate hike of 0.25 percent, so that we end this cycle at a rate of 5.50 percent.
However, inflation has already fallen considerably. Especially if we do not include housing, the consumer price index (CPI) in the United States is 0.7 percent on an annual basis. Based on that percentage, one could argue that the Federal Reserve’s monetary policy is dangerously tight right now.
Especially when you consider that interest rate hikes from the Federal Reserve often take 12 months or more to make their full impact felt. In the truflation chart above, we see that they estimate the current CPI at 2.14 percent.
Truflation is interesting because they base their inflation measurements on millions of data points that they update daily. They not only give a CPI of 2.14 percent for the moment, but also state that inflation peaked at 11.27 percent last year.
The official CPI of the United States stood at 8.93 percent last year. A lot lower than the data from Truflation. Based on Truflation’s data, you could argue that the Federal Reserve is currently far too aggressive and that they can push the U.S. economy toward a deflationary recession.
Not the only one
Truflation is not the only alternative source of inflation that suggests inflation may be a lot lower than the Federal Reserve currently thinks. According to Federal Reserve data, the Core Personal Consumption Index (Core PCE) is stuck at an annualized score of 4.62 percent.
However, the chart above from PennState, another alternative inflation source, states that it is currently coming in at 2.07 percent, almost at the Federal Reserve’s target. In fact, PennState’s alternative CPI meter currently stands at -0.86 percent.
In that respect, isn’t it strange that the Federal Reserve is preparing for another interest rate hike? Meanwhile, wouldn’t Federal Reserve policymakers be worried about the U.S. economy?
We are also currently seeing a significant decline in bank lending, which we cannot separate from the Federal Reserve’s interest rate hikes (and, of course, the cautious banking crisis of March 2023).
All in all, we are currently in a climate in which it is advisable to be careful. The market is hugely optimistic about the near future, while the macroeconomic data points in a different direction.
