The value of small-cap stocks is dropping. This isn’t good news for the economy.
The bitcoin market has reacted to statements made by Federal Reserve Chairman Jerome Powell regarding the increased risk of high inflation lasting for a long time.
We discussed the rising DXY (US Dollar Currency Index) in 2021 and the negative influence it could have on bitcoin’s price in the Daily Dive #102. The DXY, SPX, and bitcoin markets all promptly reacted today after Federal Reserve Board Chair Jerome Powell spoke about the increased risk of persistently high inflation in the United States and a probable expedited taper. The DXY increased by more than 1%, while the SPX 500 Index and bitcoin both fell.
We’ve seen rising and extreme market volatility over the last several days, with the VIX surging over 54 percent last Friday, the fourth largest one-day percentage spike in the index’s history. This is a warning indication for investors to expect short-term volatility.
The Federal Reserve is in a difficult position: it must choose between rescuing the bond market and sustaining the US economy. As inflation rises above 6%, a quicker taper takes us closer to interest rate hikes, which are the only way to help fixed-income investors who are stuck with real negative yielding US debt.
Expectations of increased tapering in conjunction with interest rate hike plans, on the other hand, will drive asset values lower as the system’s additional liquidity is depleted and the cost of capital rises, negatively impacting present equities valuations. Following yesterday’s statement, the SPX dropped 1% in 15 minutes.
